In a traditional venture capital funding ecosystem, growing companies and startups typically begin with a seed round — a small capital raise up to $1 million, frequently targeting friends and family. Once the business model is up and running, the company can go further up the food chain to VC firms to secure a series A raise. As the model is further proven and scale begins, venture capitalists can, with the right milestones achieved, fund a series B round and when even more triggers are met, will conduct a larger, well syndicated series C.
But where is the liquidity? How can VCs exit if the company is growing but not at the accelerated rate they need to commit significantly more capital? This is a question for VCs, the company’s founders and original group of angel investors.
It is well known that the number of Initial Public Offerings (IPOs) has dwindled to a fraction of the go-go years that were decades ago. Private Equity recaps, corporate mergers and acquisitions by strategic buyers willing to pay premiums are the staple for most VC exits these days, with some notable exceptions of a successful IPO (we all applaud The Trade Desk!). Deals like TTD are not common, and with its market cap approaching $2 billion, the valuation far exceeds the market cap of so many deals caught in illiquidity in many venture portfolios.
Additionally, many portfolio companies plateau from a VC’s perspective. They are growing 20% or 30% a year, not the spectacular rate required to gain a series C, yet the company is worthwhile for other types of investors.
So what is the solution? For many, it is an Reg A+ offering.
At first glance, Reg A+ might seem like competition to VC’s because companies can use Reg A+ raises as alternatives to a series B or C raise, and that can be useful to early investors and of course the firm. It is a great process to turn customers into investors and grow both bases.
In fact Reg A+ can be an important friend to VCs because it can serve as a new path to additional capital through its customers, or an affinity group that may become customers, ensuring success for the portfolio company. In other words, Reg A+ can act as a new funding source, an early exit opportunity, or by publicly listing shares, a path to liquidity for all types of investors. Speaking of liquidity, portfolio companies issuing shares can buy out VCs and VCs can walk away with returns in hand without having to wait for M&A transactions or traditional IPOs — potentially a win-win.
All this is possible, assuming that the Reg A+ raise is successful. The portfolio company needs to fit the profile, which is frequently consumer, mass audience or niche following focused. They need revenue, some cash in the bank and enough of a following to leverage and replicate their audience. This base can be customers, social media followers and natural affinity groups. I can tell you that our firm delivers a strong percentage of new customers along with the investors, as many prospects will become both. We require a clear path to acquiring enough data to justify pitching a sizeable target investor group that can be motivated to or already has an affinity to the company. If a company has a strong basis for an affinity group and a high potential to scale its customer base, that is great news to our team.
As a former portfolio manager, we have developed a process that relies on data, analytics and facts when deciding which companies to assist. E5A only works with companies that we calculate with strong conviction to successfully complete the raise. Like my VC friends, we swiftly perform triage to see if we should perform more diligence to decide if we are a fit for a candidate and also calculate the probability of success.
We have built a network and are now part of an ecosystem of some of the best industry specialists that have formed processes that guide companies throughout a Reg A+ raise.
Today, we welcome VCs to a new form of capital raise — one that can add liquidity, all aimed at growing promising companies.