IT'S A bear’s holiday; they are roaming freely on Wall Street. Occasionally, a bull pokes its head out and makes a run for it. But he goes it alone, no thundering herds! The current situation may have forced you to delay raising capital, opting instead to wait for the market to recover. Well, the indices are still way off their all time highs and your cash reserves are dwindling. Since you might not be able to wait much longer, you might be wondering what options are now available for raising money.
Whether your company is privately or publicly held, a private offering is still a possibility. There are two tracks you can follow to carry out a private offering: Either hire an agent (i.e. an investment bank) or go it alone. Both approaches can be successful but both have their positives and negatives. More about that later. For now, the question is, how do you embark on a private offering?
First, you’ve got to make sure your house is in order and that your board is on-board. Make certain your financials are up to date and have been reviewed or audited by your accountants. Are your lawyers up to speed? Now is the time to upgrade your legal counsel, if need be. Also, make certain you have enough shares authorized, in both common and preferred stock, to carry out the proposed offering since you may wind up issuing more shares then you originally planned.
How much money should you look to raise? If possible, try to secure at least 12 months of cash. Less than that and you will be back in the market soon after your closing. If you can raise more, take it! In order to carry out the offering, you also need to determine what your company is worth. Do your homework to figure out how you measure up to comparable companies and be realistic in your analysis.
For a publicly traded company, this means knowing whether the stock is getting the same quality analyst coverage as comparable companies. Is all of the coverage from the same banks that underwrote the initial public offering? How does your company’s daily trading volume compare? Who are your existing shareholders? Have any institutions that are known biotech investors invested in your company?
You should be prepared to offer a discount off of your current share price. Expect the discount to be anywhere from 15 to 30 percent. Warrants, a security to buy shares at a later date at a pre-set price, are also an inducement for potential buyers, so don’t be afraid of them.
For privately held companies, don’t be surprised if your next round is a “down round.” The lack of a public market is forcing down valuations of privately held companies.
And to all companies: Don’t focus on valuation. If you successfully execute your business plan then the additional dilution will be of little consequence.
Both private and public companies should also be prepared to answer a series of questions that potential investors will surely ask: Have you missed milestones? Who are your strategic partners and customers? Have you recently lost any deals?
Also, if you are looking to conduct a private offering, don’t expect an investor to buy common stock and don’t be afraid of selling convertible preferred stock. If structured properly with the right investor, it can work to your benefit, especially if you know that there will be a flow of positive news. Linking the deal to milestones demonstrates your belief in the company and in your management team to execute. If you are public, see if they will convert the shares at a premium to your current price. Be bold, be creative.
Now the question is, do you raise money on your own or do you hire a banker? Some companies have been successful raising new capital on their own. Many of these companies have great relationships with the investment community either from repeated “road shows” or through management and directors. Many public companies know who would like to increase their holdings in the company or who would like to establish a position in one piece (as compared to buying stock little by little in the market). Just remember, being your own banker is time consuming! Your time is better spent growing your business.
Bankers can be very helpful since they can do all of the legwork to contact these investors and structure the deal. In addition, the banks will have their own cohort of investors that they will introduce to the company. Bankers can also guide you as to whether or not it is worth filing a “shelf registration,” (a method of pre-registering the shares that you intend to sell) or to hold off and negotiate with the investors as to when their shares will be registered. This advice in large part will be based upon how your company is perceived in the market and what will get the best deal terms.
As a private company, interview the banks carefully. What is a bank's track record in completing financings for private companies? The bank’s track record may be very different for private placements for private companies versus private raises for public companies. Speak to the bank’s clients. Ask them if they received senior banker attention and whether the process progressed smoothly and in a timely fashion.
Some things to keep in mind regarding banks: It is great to develop relationships, but just because a particular bank raised money for you now doesn’t mean they will be interested in the next round. Bankers move around and so do analysts, and when they move it may be out of banking. And just because a bank has a great reputation and track record doesn’t mean that this will carry through for your offering. Remember that guy named Murphy…
Banks all charge about the same fees, so don’t nickel and dime them. If you find a bank or agent who is out of the (fee) range (either above or below), be suspect. Expect to reimburse for expenses, including the investors, but agree on a cap upfront.
Remember not to get hung up on valuation. A number of the current top-tier biotech companies raised money when their valuations were at all-time lows and they now have market caps in the billions. There are many companies that share your predicament. Therefore, the private market is going to start getting crowded, so when cash is offered and you can live with the terms, take it and grow your business.
Ira Leiderman is managing director of the Palladin Group, a New Jersey-based investment management firm. He was previously a senior healthcare banker at Gerard Klauer Mattison. You can e-mail Ira at [email protected] .
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