Spotlight on: Alternatives to the public market
With a variety of funding support alternatives to the traditional listing route on offer, we hear from Claire Fargeot, governance and reporting expert and ELITE tutor, who shares her views and experience on the options available, as well as the issues companies need to consider.
What are the main alternatives to the public market?
Recent research has shown that companies are coming to the public market for funding much later in their life cycle with the level of privately raised funds pre-IPO rising dramatically. The main alternatives tend to be private equity, crowdfunding, peer-to-peer lending, debt and ultimately private placement.
Is there one route favored above any others, and why?
Each company has a unique set of circumstances so funding routes must be chosen with these in mind. There are benefits and drawbacks with each route but it’s important to get the best fit between the goals and ambitions of the company and those of the funding provider.
Private equity remains popular and there are much larger private equity funds in existence now that can support bigger deals and funding needs. Crowdfunding can be very successful if your business is easily understood and marketed well. Peer-to-peer lending is still an establishing practice here in the UK, not yet having made it into the mainstream. Private placement tends to be used pre-IPO only when there is a clear liquidity event (such as an IPO) in mind. Raising debt finance can suit some companies very well, too.
What are the advantages and disadvantages to seeking an alternative to listing?
The most often cited advantage of remaining a private company is that of being able to continue ‘flying under the radar’. The level of public scrutiny and demands for good governance practices, reporting and stakeholder engagement tend to be much lower for businesses that decide to remain private. Listing does, however, offer certain advantages for the founder and the company. It is a convenient way of providing a founder with an exit and it gives the business a currency for acquisitions in the form of its own stock. It is also relatively easy to return to the market for additional capital and many businesses relish the credibility and profile a listing brings not just with their investors but also employees, suppliers and prospective customers.
Companies looking at alternatives sources of funding must weigh up the various likely impacts and make an informed choice in terms of suitability, risks, use of existing resources and likely returns and outcomes. The most important metrics to focus on are cashflow, liquidity and the management structure. It is important that businesses research their options carefully and make informed choices.
In your opinion, what does the future hold for companies seeking alternative routes?
When economic times are hard, banks are less keen to lend so it is important that entrepreneurs have a wide choice of different and reliable funding options available to them. Generally speaking, there is more patient – long term – capital available so companies should not feel obliged to seek a particular type of funding.
But it shouldn’t be forgotten that not listing is still a viable option, and there are more businesses that are deciding to stay private as it suits their business model better. There is a wide array of exit routes available to private businesses: trade or strategic sale, joint ventures and alliances, a private equity sale or a refinancing.
Case study: Emoov
Hybrid estate agent Emoov has explored alternative investment options since its creation in 2010. CEO Russell Quirk explains more:
‘Emoov’s experience of fund-raising has certainly been mixed. This is predominantly because we have found traditional routes, particularly venture capital (VC), to be awkward. Indeed, the VC approach is often very binary and fails to take account of the people in front of it or see above pure metrics.
‘Given VC friction, we’ve turned to a myriad of other routes – high-net-worth (HNW) individuals, family offices, crowdfunding and debt. By far, our capital table is predominated by HNWs and family offices. Run by entrepreneurs and those who have actually managed businesses, their criteria is no less strict where product market fit, growth, addressable market and unit economics are concerned, but they use instinct and common sense in their decision-making and, importantly, back people and their abilities and determination, not just a spreadsheet.
‘Crowdfunding is an awesome route to funding, and it’s fun, too. We’re currently considering Crowdcube again for a second raise (we raised £2.6 mn ($3.5 mn) in 2015) this time as the UK’s first ever pre-IPO crowd raise.’