Looking for an Exit: Startup Founders, Investors, and Bankers Offer Some IPO Guidance

Xconomy San Diego — 

There have been 108 IPO filings nationwide so far this year, which is more than seven times the paltry 15 filings that were made by this time last year, according to IPO data from Renaissance Capital. The big local story so far has been Carlsbad, CA-based MaxLinear (NYSE: MSL), a wireless chip design company founded by CEO Kishore Seendripu, which raised almost $90 million in its IPO in March. (About $50 million of that was intended for the company’s capital needs, and the rest largely for investors). San Diego’s Trius Therapeutics, which registered for a $78 million IPO in November, postponed its plans in March to conform its Phase 3 protocol for its antibiotic drug candidate, torezolid phosphate, to accomodate new guidance issued by the FDA.

So what are the factors affecting IPOs, and what kind of guidance are San Diego’s experienced CEOs and other experts offering about taking startups public? The San Diego Venture Group organized a discussion on the topic at its monthly meeting last week at the Hyatt Regency La Jolla. Here are some of the key points they provided:

—Startups and their boards are giving more serious consideration nowadays to reverse mergers with shell companies (usually public companies with inactive business), according to Byron Roth, chairman and CEO of Roth Capital Partners, a leading investment bank for small-cap public companies that’s based in Newport Beach, CA. “Reverse mergers used to be a penny stock promoter’s game,” Roth says. “But now it’s a hybrid between an IPO and a private buyout.” Reverse mergers can represent an attractive alternative for companies that are looking to raise relatively small amounts of capital—less than $50 million—by structuring the financing in a way that enables a hedge fund to make a private equity investment in the new public company immediately after the reverse merger takes effect. Roth says many hedge funds have rules that restrict them from making investments in private companies, but a variety of PIPE-type financings (Private Investments in Public Entity) can be structured to close almost simultaneously with the reverse merger.

—The advice to startup founders offered by James Sweeney, who started CardioNet (NASDAQ: BEAT) in San Diego and oversaw its 2008 IPO at a valuation of more than $425 million, is “to avoid going public at all costs.” Sweeney says … Next Page »

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