PIPE investors give the small public company capital in exchange for newly issued stock. Generally, they purchase stock at a small discount from the price that it is trading at in the public market. They may also invest in a convertible preferred or a convertible note, but the conversion price will be at a discount from the price at which the stock sells in the public market. They always receive a warrant kicker. This method of financing has basically replaced secondary offerings. For a small-cap public company, it is a great way to raise growth capital. They don’t buy shares in the open market; they buy from the company, and it’s a highly structured transaction.
...If you’re a small public company raising $10 million, no one’s going to do a secondary offering for $10 million. Maybe a company wants to make an acquisition, and they need $5 million in cash and they want to raise a little more for working capital. Goldman Sachs, Merrill Lynch and Morgan Stanley aren’t going to do a $10 million deal, or a secondary or a PIPE. It’s too small. So the alternative is to approach PIPE investors to raise capital. On the basis of our internal research, we guide PIPE investors to companies that merit investments.
...We like the investor’s capital to be used to accelerate growth through acquisition. Another good use of capital is to build, develop or launch a new product or service that’s going to require an investment. We’ll look thoroughly at the capital structure, make sure there’s not a lot of warrants or options that are struck below where the investors are purchasing a stock. One of the things we like to see that doesn’t happen often is, sometimes management puts in money alongside our investors. In today’s world, that’s a novelty.
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.