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Small Companies Can IPO

by on October 1, 2013

ipoHow can a small company doing less than $5 MM in annual revenues raise more than $20 MM by going public?  It’s been done and I know how.

The standard plan is to raise seed money, followed by VC money, then more VC money, then more VC money, all the time diluting the Founders and early investors, and grow and grow, organically mind you, until you’re doing more than $150 MM/year or more in revenues, then go public at a huge valuation.  Then what?  Grow some more?  That takes a lot of time.  There is a faster way.

The perception is that you have to be big to IPO.  That’s not true.  What most don’t realize is that there are approximately 4,500 publicly traded companies doing less than $10M in revenue. Of those, 2,700 are doing less than $1M.  Just because you’re not on the big boards on day one doesn’t mean your value is any less.  Focus on the OTC BB exchange (Over the Counter Bulletin Board), which is a very reputable market and a great platform to eventually migrate to the NASDAQ, NYSE, AMEX, etc.

K3 Strategic Development Group is a specialized growth strategies firm that provides innovative solutions for companies that are highly successful in obtaining business from the government. For simplicity sake, we’ll call them government contractors.  They have created and are implementing an IPO path that is a captivating strategy for these motivated contractors to implement an aggressive expansion model for their company.

These contractors are appealing as IPO candidates because of three distinct factors:

1)      They typically bring a very solid foundation – years of profitable operations, little to no debt, and a well-defined organizational structure.

2)      They are typically very motivated to expand their business. Most contractors understand the abundant opportunities available to them in the government sector but perhaps lack the financial ability to capture more business.

3)      With a strong market presence and sustainable revenue, they are ideal platforms for growth to make strategic acquisitions and become market leaders.

Advantages to going IPO

There’s a lot of talk about going IPO and a lot of companies do it, like Twitter, but why would a small company want to IPO?

1)      Going public offers the greatest return for contractors. The IPO strategy provides the greatest access to capital, intense market awareness and notability, and a mechanism to launch an aggressive acquisition strategy.  With any private funding source the contractor will typically have to give up a substantial portion of equity (51% +) and possibly even control. Any small government contractor will tell you that is not a feasible option because they would lose their preferential status. By taking a company through an IPO, a contractor could expect a significant amount of capital for a minority stake and not have to worry about control issues as well.

2)      A major benefit of being publicly traded is that ownership (shares of stock) can be used as a currency or liquid asset. Stock is ideal for making acquisitions, incentivizing employees, or even raising more capital.

3)      One of the most intriguing parts about being a public entity is the increase in valuation a company experiences. In the public sector, the worth of your company is not only apparent at any moment, but yields a much higher value because it is largely based on speculation. Simply winning a contract or announcing a new partnership could have a substantial effect on your share price. Factoring in much more than simple revenue and profits, if the market thinks you’re valuable and a good investment; then you are.

Challenges

So what are some of the biggest challenges for this process?

1)      The contractor’s lack of knowledge and experience of the investment community.  Most smaller contractors are former military or government employees and are great at running their company and capturing business, but don’t necessarily understand the components of aggressively growing their company.

2)      Getting the contractor to understand their own value. Humility is almost a disease in the small government contractor arena. Most CEO’s, especially military veterans, just think that they have a good little business and that’s all there is to it. When in reality they carry a significantly higher value than their commercial counterparts.

3)      Getting the investment community to grasp the reality of the contractor’s market. Private investors and especially Wall Steet bankers are not accustomed to seeing a small IT integrator that has the next five years of revenue already booked, whether they get out of bed or not, AND that they have a particular business status that substantially decreases competition leading to a strong revenue model. Definitely the most enjoyable part of the process is seeing the looks on the investor’s face when they finally grasp the strength and potential of these contractors.

Conclusion

Quite simply, contractors need a strategy that is complementary to the market they work in and investors need great candidates to fuel with capital. K3, in my opinion, brings real value because not only are they intimately familiar with both the government and investment communities, but are experienced and excel at being the conduit to bring these worlds together; both with their ability to communicate the overall vision and to facilitate the strategy in a practical sense. I have yet to come across another group with our background that is experienced at implementing this growth model.

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From → Venture Capital

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