Using Reverse Mergers Instead of Venture Capital for Venture Funding
The more you gaze at reverse mergers the harder you commence knowing that reverse mergers compare favorably using the classic capital raising model for venture funding.
Venture funding is key to the success of any new or growing venture. The classic capital raising model appears to work this way: The entrepreneur and the team formulate your business plan and try to get it looking at a venture capital firm. If they are well connected, they may succeed, but a majority of growth capital firms are overloaded with funding requests.
If the entrepreneur is not in a business that’s the latest fad among vc’s, he could not be able to find funding.
If the entrepreneur is incredibly lucky, he will be invited to pitch the VC. If the venture survives this trial, it’s going to get a capital raising terms sheets. After prolonged and adversarial negotiations, an agreement is struck along with the venture company signs hundreds of pages of documents. In these documents, the entrepreneur and the team give up a lot of the charge of the corporation and usually most of the equity inside the deal. Their stock is locked up and when they would like to sell to get some cash, they probably have to offer the customer on the VC first. Time from start to finish – ninety days or maybe more.
If the company needs more income, it requires negotiating with all the VC along with the entrepreneurial team that may lose ground inside the deal. The company may need to reach a certain set of milestones to get funds. If the corporation falls behind schedule, it might lose equity share.
As the venture develops, the VC’s might or might not add value, and a lot likely will second-guess the entrepreneur and his team. If the venture succeeds, the venture capital firm will reap the majority of the rewards. If the venture does not succeed, the majority of the capital will be lost forever. Some ventures wind up in the land from the living dead – so good enough to end, bad enough to ensure success.
Worst case scenario, the venture capitalists assume control at the outset, become dissatisfied with management, and oust the initial management which loses nearly all of not every their position along with their jobs.
The Reverse Merger Model
The entrepreneur finds a public shell. He has to develop some cash to get this done and spend the money on legal and accounting bills.
He buys control and merges into the shell on terms he determines. He keeps control but he’s the burdens of the public company.
He determines the way to run his company, including salaries. He can offer stock options to draw talent. He can acquire other companies for stock. He determines when he cashes out.
Instead of getting to report for the venture fund, he’s to report towards the shareholders.
The subject to the limitations from the securities laws, he can sell a section of his stock for cash.
He can seek money whenever he wants; he is in control.
Problems: He may be attacked by short-sellers. He may obtain a shell having a hidden defect. He has to pay for the shell.
From the Investors’ Point of View
Venture capital money is typically funding by institutional investors seeking professional management. They do not have the time to deal with many small companies and delegate it might be towards the growth of capital partners. Small investors are hardly ever permitted. Venture capital funds permit institutional investors to diversify.
Venture capital fund investors are located in years. If they make 30% each year returns, they’ve got done well.
The growth capital model encourages the investment capital firm to negotiate hard for affordable and harsh terms. A venture team seeking funding that knows it provides a big future might not exactly submit to such terms. However, for the weak company that is wanting to get salaries for any few years before folding, in other words, a business that is certainly a bad investment, can accept any terms, it doesn’t matter how harsh. Thus, the growth capital model is skewed toward selecting out your worst investments and repelling the best.
Small investors can get stock in reverse merger companies. They must take the time to investigate these businesses but may lack the resources to do this intensively. Most small investors generate losses. If they win, they can win big. They can, should they choose to accomplish that, diversify their investments. They do not influence management, except to sell if they’re displeased.
Summary
The reverse merger model compares very favorably with capital raising. Whereas venture capital is perpetually in scarce supply, reverse mergers are invariably on the market for just about any company that may interest investors. The company can usually raise money on better terms from your public than from venture capitalists.
Overall, the large advantage of the reverse merger is that the organization has total treatments for its destiny. The team can be assured to be rewarded well for fulfillment. The company sets the terms, can market stock whenever it sees fit on whatever terms it merits, the insiders can market too, along with the venture team is not second-guessed by amateurs within their field, and also the venture team will not have to fear losing equity or jobs.
Another advantage is less risk for the investor. The investor is within a publicly trading stock. If the investor does not like what’s happening, he can sell. He may sell at a loss, but he can emerge. The investor could also select companies himself, as an alternative to making just one investment decision – current debts back the VC company which then takes power over the rest of the decisions.
