Kickstarter King Laying Off 25% of Staff a Reg A+ Candidate?

Kickstarter King Laying Off 25% of Staff a Reg A+ Candidate?

Smartwatch pioneer Pebble recently announced they were laying off 25% of their staff. Pebble CEO Eric Migicovsky told Tech Insider– “We’ve definitely been careful this year as we plan our products,” Migicovsky said. “We got this money, but money [among VCs in Silicon Valley] is pretty tight these days.”

Perhaps you have heard of Pebble as they were “one of the first companies to launch a modern smartwatch”. Unfortunately, first doesn’t mean much in Silicon Valley, especially when your competitors are tech giants like Apple and Samsung.

Pebble was also one of the most successful KickStarters ever. Not only did Pebble’s 2012 Kickstarter raise $10.3 million but when Pebble went back to Kickstarter, in 2015 with an updated product, they raised $6.2 million in less than 4 hours. In total, Pebble raised over $30 million with two Kickstarter campaigns.

Since its Kickstarter success, Pebble decided to look for a more traditional VC funding. Unfortunately for them, it has been a bumpy road. Last May, TechCrunch reported that the company turned “to a Silicon Valley bank for a $5 million loan and $5 million line of credit” versus more traditional equity funding. As of writing this “Migicovsky also confirmed that his company had raised $28 million in debt and venture financing over the past eight months”.  Even with the Kickstarter success and VC funding, Pebble is still forced to layoff staff.

The slow IPO market, fears of a unicorn bubble, and fierce competition in the smartwatch space have caused VCs to be cautious. Perhaps this will be a blessing in disguise for Pebble, the kings of crowd funding.

With Reg A+ transforming the crowd funding landscapes and the recent success of Elio Motors’ Reg A+, this may be perfect timing for Pebble to use Reg A+ to alleviate their funding problems. While I haven’t been able to find anything official regarding a Pebble Reg A, this may be the natural solution for the kings of crowd funding and other tech companies struggling to raise capital in Silicon Valley.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

5 Reasons Why M&A Is The Best Way To Grow A Micro-Cap Public Company.

5 Reasons Why M&A Is The Best Way To Grow A Micro-Cap Public Company.

Growing a micro-cap public company can be very difficult. Many approach growing a micro-cap public company the same way they would a start-up. While organic business growth is important, it is usually too slow and expensive for a micro-cap public company.

In my experience, the best way to grow a micro-cap public company is through acquisitions. Micro-caps are basically designed for growth through M&A. In a previous post, I compared a micro-cap public company to a Ferrari and M&A to the open highway.

Some of you reading this might be thinking; “how could anyone compare a micro-cap to some of the finest luxury sports cars in the world?” If you are one of those readers, your question is probably a result of watching directionless drivers attempt to drive their Ferraris through the mud.  By driving through the mud I mean, trying to grow a micro-cap public company like a private business.

There are numerous examples of micro-caps succeeding by growing through acquisitions (if you don’t want to take my word for it, check out the companies that “uplisted” from the OTC to a senior exchange last year). In this post I will explain why, in my opinion, M&A Is The Best Way To Grow A Micro-Cap Public Company.

M&A Is The Best Way To Grow A Micro-Cap Public Company for 5 reasons; transparency, equity currency, accretion, capital markets, and net operating losses.

Transparency – Whether SEC reporting or meeting an alternative reporting standard, public companies are required to maintain a relatively high level of transparency. From PCAOB audited financials to timely disclosure requirements, public companies (big and small) are held to a higher standard than private companies. While complying with these requirements can be burdensome (as many of you know), compliance also provides sellers and investors with a certain level of comfort. Sellers (receiving notes and/or stock as part of the purchase price), equity investors, and lenders can be confident in publicly available information regarding the acquirer and know that the acquirer will continue to meet important transparency standards in the future. Transparency encourages sellers to require less cash up front and lenders/investors to provide greater funding under better terms.

Equity Currency – Because public companies (should) have stock that is liquid with a third party (market) valuation, stock can be used to pay for part or all of an acquisition.  In theory, stock in a public company can easily be sold for cash affording sellers the opportunity to take stock for future upside while maintaining the option to liquidate at any time. In fact, nearly 20% of M&A transactions in 2015 were all stock transactions. It’s much more difficult for private companies (especially smaller private companies) to use stock for acquisitions because sellers will need to wait for a liquidity event (IPO or acquisition) to turn their stock into cash and the valuation of a private acquirer’s stock is much more abstract.

Accretion – Micro-cap public companies, with exciting growth stories, often have stronger valuations than comparable private companies. Stronger multiples mean companies can acquire private companies at lower valuation multiples and receive a higher valuation on the newly acquired business in the public market (a/k/a: accretive acquisition).

Capital Markets – Access to the capital markets (and the liquidity and valuations they provide) let public companies raise more equity capital faster, and at higher valuations, than comparable private companies. Combining equity capital with stock consideration, seller notes, and traditional acquisition financing; micro-cap acquirers can complete larger acquisitions faster and for a smaller percentage of equity.

Net Operating Loss – While a net operating loss (“NOL“) may be considered a bad thing because they are a result of a business losing money, in many cases NOL’s can be used to offset taxes on future profits (including the profits of acquired businesses). Micro-caps with long operating histories, high legal/accounting/compliance expenses, and little revenue can often offset the tax bills of profitable targets. By levering  past losses a micro-cap acquirer can increase the bottom line of a profitable target once acquired thus increasing its own bottom line.

Those are the  5 reasons why (I believe) M&A is the best way to grow a micro-cap public company. Next time you see a someone lost in the woods with their micro-cap Ferrari, do them a favor and direct them to the M&A highway.

Do you think M&A is the best way to grow a micro-cap public company? Do you have a better strategy? Please comment and share!


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Pros and Cons of Equity Lines for Micro-Caps.

Pros and Cons of Equity Lines for Micro-Caps.

If you run an SEC reporting micro-cap public company, you have probably been offered financing through what is commonly referred to as an equity line (also referred to as equity purchase agreement or credit line). Equity lines usually require an issuer to register stock (through an S-1) to be sold from time to time to a private investor via “put notices”.

Often, micro-cap management teams get into financing situations without fully understanding the pros and cons of specific financing structures. I will  attempt to outline some of the major pros and cons of equity lines for micro-cap public companies below.

Benefits of Equity Lines for Micro-Cap Issuers: Low cost & high control

Relatively Inexpensive Capital – Compared to the equity funding options available to most micro-cap issuers (especially for general working/growth capital), equity lines have a relatively low cost of capital. Most lines have discounts to market of 25-5% on the date of each put. Often these discounts are accompanied by upfront fees and small ongoing fees. Among other things,  registration greatly decreases the investors risk and thus decrease the cost of capital to the issuer.

Management has Control – While naturally all equity financing have some dilutive properties, equity lines allow management teams to control the dilution.Because the issuer elects when to draw down the line, they can draw down when the market price is high and liquidity is abundant. Low cost coupled with high control make equity lines a great financing option for issuers with strong valuations and liquidity or issuers that plan on building strong valuations and liquidity in the near future.

 

Negatives of Equity Lines for Micro-Cap Issuers: SEC registration, funding based on market & upfront costs

SEC Registration – Equity lines require the filing of an S-1 registration. Any funding is dependent on the SEC reviewing that filing and declaring it “effective”. Those who have gone through the SEC registration process before know it can be a long, expensive, and exposing process.

Market-Based – Funding from equity lines are completely contingent on liquidity and market price. While the issuer can control when to submit put notices, management can’t or won’t submit a put notice when the market price is low or there is little liquidity. In most cases, because the stock is registered, the private investor receiving the stock via the equity line will be selling the stock immediately.  If an issuer submits a put notice when there is no liquidity, all they are doing is dumping stock on their own market. Without liquidity, the price will fall too low for another put. While management probably has their own limit for a minimum put price, equity line documents also set a minimum price. Not only can management effectively block the use of the equity line with excessive puts but, if the price falls for other reasons the equity line still becomes unusable.

Upfront Expense – Private investors providing capital via equity lines usually charge high upfront fees. Fees can range from $10s of thousands in cash to $100s of thousand in promissory and/or convertible notes (or both). These fees usually don’t cover/include all of the expenses of preparing the S-1 filing, amending the filing, and having attorneys communicate with the SEC.

In summary, if you have liquidity, a strong valuation, a clean operation, time and excess capital – an equity line is a perfect funding option for you! Equity lines are a great way for micro-caps to raise equity capital as long as they understand the requirements.

For more on equity lines (and their big brother, the ATM facility), check out this cool white paper from Practical Law Company HERE.

Did I miss any of the pros and cons of equity lines for micro-caps? Please feel free to comment and share.


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

How to Raise Capital with a Great Idea.

How to Raise Capital with a Great Idea.

You have a great idea! Next step is to turn your idea into a business. A business that makes money. A lot of money! Sounds great but, as most of you probably know, it’s not as easy as it sounds (in fact its much much much harder).

There are a number of paths to business success and sometimes those paths include a micro-cap public company. Those of you on the micro-cap path probably followed it thinking it would lead to easy money. Depending on how far down the road you’ve gotten, you may have realized raising capital as a micro-cap is anything but easy. So now that you are here, how do you make the best of it?

In 99% of cases, an idea alone isn’t going to be enough to get you the capital you need (under half decent terms) to grow your business. If you still think someone is going to give you a big check at a strong valuation for you to attempt to execute on your idea,  you haven’t been at this long enough! If you are willing to accept that a $10 million check at $1 billion valuation for your idea isn’t coming, I have a solution for you.

The solution – acquire a profitable business! While it may be hard to find funding for your idea, it is easier to find capital to acquire a profitable business with assets, employees, customers, revenues, etc. It’s even easier if your great idea is synergistic with the business you are acquiring (and seller financing can play a large role). Once acquired, you can leverage an acquired business’ assets to implement your great idea while leveraging its financial strength to raise growth capital.

While this strategy works well for private companies, it works even better for micro-cap public companies. Micro-cap public companies are uniquely positioned to grow through acquisitions (see my previous post: “Micro-Cap Acquisition Funding – 5 Ways for MicroCaps to Fund Acquisitions.“). Further, if your idea is as good as you think it is, seller financing could help you close a large acquisition with limited outside financing (see my previous post: “Do your Targets Believe? The Key to Micro-Cap Acquisition Financing.“).

As an added bonus to the micro-cap CEOs concerned about their share price and liquidity, acquisitions are usually very good for a micro-cap’s stock. For micro-cap IR teams trying to avoid “fluff”, an acquisition is a big tangible event. A good acquisition can take a company’s market value from a fragile abstract concept balancing on an idea to a value based on tangible financial metrics (plus the added market value from the great idea).


 

About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR ENTERTAINMENT PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.

Unicorn Ratchets – A Valuation Fairy Tale.

Unicorn Ratchets - A Valuation Fairy Tale.

Going from start-up to $1 billion+ valuation, in a short period of time, is something all entrepreneurs, employees, investors, and other stakeholders dream about. This fascination with “unicorn status” has led unicorns and their investors to stretch the boundaries of conceivable valuations. In 2009 there were just 4 unicorns, as of writing this post there are 152.

As the number of unicorns grow, valuations increase into the $10 billion+ range, and larger more traditional investors get involved (mutual funds, hedge funds, sovereign wealth or corporate investors vs. VCs), unicorn financing structures have gotten more complicated. The recent IPO of tech unicorn-Square, Inc. got many to notice what is known in the investment community as a ratchet.

Investopedia defines ratchets as;

An anti-dilution provision that, for any shares of common stock sold by a company after the issuing of an option (or convertible security), applies the lowest sale price as being the adjusted option price or conversion ratio for existing shareholders.

Law firm Fenwick & West LLP noted that “Approximately 30% of unicorn investors had significant protection against a down round IPO“. Examples of unicorns with ratchets in their funding transactions include Lyft, Chegg, Box Inc, and more. There are many different types of ‘ratchets’ but the general idea is that if a company raises capital, gets acquired, or goes public at a lower valuation than a previous “ratchet round”, investors get their earlier investment valued at the new round’s lower valuation (or a discount to that new lower valuation).

Ratchets are essentially steroids for unicorn valuations. TechCrunch points out that;

It’s increasingly common in mega rounds to build in protections such as IPO ratchets. It’s a sort of win/win for companies and investors. Companies get their shiny unicorn valuation (which helps with recruiting, in addition to being the vanity metric du jour), and investors get some downside protections

So what does this all mean? It means that many unicorn valuations aren’t “real” rather, they are fantasy portrayed by investors and founders. As with most fairy tales, those telling the story (investors, founders) know its not real but those listening to the story (retail investors, employees, media, etc.) may be enchanted by the tale. Unfortunately, when things go wrong, employees and others in the dark on unicorn ratchets are left “holding the bag” (see my previous post, “When Unicorns Die, Employees go to Hell.“) . Perhaps we call these companies unicorns because their valuations are as fictional as unicorns in the traditional sense.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: This blog and all of its contents (the “Site”) are for entertainment purposes only. The views expressed are solely those of the author. This Site should not be construed as an offer to buy or sell any securities or as an offer to transact. Nothing on this Site should be considered financial, legal, or tax advice.