IPO Failure Rates Show Why Venture Debt Funding is a Better Option

Funding is the lifeblood that companies need to grow and scale their operations. You can’t always rely solely on revenue. Other options include borrowing the money you need or finding investors willing to give you a cash infusion. Going public via IPO or SPAC funding is another alternative, but the numbers suggest it might not be a good one.

According to StockAnalysis.com, there have been 117 initial public offerings (IPOs) in 2023. As of the writing of this article, forty-six of them are showing a positive return in 2023. Ten of those returns are in double digits. Just four were over 100%. Conversely, sixty-four of this year’s IPOs, more than half of the companies that went public, posted double-digit losses. 

These numbers are not an anomaly. Statista reports that just 34% of companies that go public via IPO or SPAC are successful. 30% start dropping right out of the gate. Some rebound. Most do not. Owners with lofty aspirations watch helplessly as their already diluted shares cascade downward. Sadly, it doesn’t need to be that way.

IPO Failure Due to an Overinflated Valuation

The valuation of a company determines what the opening price of its stock will be when the IPO is launched. Overinflating that value is a common mistake that start-ups make when trying to secure capital investment. A higher valuation means that they can offer fewer shares in return for direct funding. Those shares will decline in value when the company goes public.

Venture capitalists and institutional investors understand how this works. They also know that failure is more common than success when it comes to IPOs. To hedge against this, pre-IPO teams do whatever they can to inflate the value of the stock to its highest point before the launch. Retail investors who buy in after that end up overpaying for their shares. 

It sounds sinister, but this is the way business is done. Instacart (CART) went public with a valuation of $9.9 billion and a share price of $30. That price dropped 15% in the first ten days. Some of that could be due to the uncertainty generated by the Fed’s comments about interest rates remaining high, but it could also be that Instacart overestimated its value.

Lowering the Valuation is a Gamble

Some companies intentionally go with a lower valuation to make sure investors make money. Genelux (GNLX) is a good example of this. They went public in January with an opening share price of $6, hoping to raise $17.5 million for their tumor treatments. They later did a private placement at $20 a share to raise another $33 million. The stock hit $38 in June.

This is just one example of how a lower valuation can lead to a more profitable outcome. Genelux based their valuation more on what they needed than on what they thought the market would be willing to pay. That may have been altruistic at the time. It turned out to be a sound business maneuver that helped the company succeed.

Unfortunately, smaller valuations don’t always work this way. Sometimes they give investors the impression that the company isn’t worth investing in. There are dozens of “penny stocks” that started out as promising IPOs and ended up selling on the OTC market. Many of them are in the biotech sector. Genelux could have easily been one of them if their timing had been off. 

Venture Debt as an Alternative to Going Public

High valuations lead to dramatic price drops. A low valuation could undermine the relevancy of your company. Both dilute ownership shares. Financing with debt leaves those shares intact while giving you the capital you need to grow and expand your business. Once the debt is repaid, you’ll be free and clear without additional shareholders to answer to.

Did the words “in a perfect world” come to mind when you read that last paragraph? Getting approved for financing can be difficult, particularly if your company is a start-up or you have less-than-perfect credit. On top of that, bank interest rates are high right now and likely to stay that way according to the last Fed report. Jerome Powell used the words, “Higher for longer.” 

Venture Debt is different. It’s a commercial loan designed specifically for business owners. The funds aren’t issued by a bank, so the approval process is different. Your creditworthiness is determined by the strength of your company, not your personal credit history. In many cases, the funds you need can be transferred into your account in twenty-four hours. 

How to Use Venture Debt to Grow Your Business

Launching an IPO requires a cash outlay, legal representation, and an appetite for risk. Borrowing money takes a commitment and a plan to repay the debt. To ensure that happens, the first step is to figure out what you’ll use the money for. Keep in mind that you’ll need to increase your revenue to a level that surpasses what you borrowed to get you there. 

There are several ways to get a return on the investment you make with venture funding. It can be used for financing or leasing equipment that will ramp up production. More products coming off the line translates into more revenue coming through the door. This can also be accomplished by upgrading your current equipment to make it more efficient.

Another option is to use venture capital funding to purchase or lease another commercial property. The new location could be an expansion of current operations or an entirely new facility. Be sure to do a cost analysis and revenue projection on the property to make sure it will be profitable enough for you to repay your loan. Contact Wise Venture if you need assistance.  

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