With the recent emergence of Regulation A+ as a funding mechanism for mature startups and mid-stage companies, entrepreneurs now have two viable options for large capital raises–the familiar VC route, or Reg A+.
For those not yet aware, Regulation A+ is a newly revamped securities regulation that went into effect at the end of June 2015 and allows companies to raise up to $50 million from accredited and non-accredited investors alike. Of the estimated 100 companies that have filed Reg A+ offerings with the SEC so far, the SEC has qualified 30 companies that are seeking an average of $23 million in funds.
I maintain that in many cases, Reg A+ is a far better choice than traditional venture capital, and I also believe there is a trend here that will accelerate over the next four years.
I have personally raised funds from VCs, including John Doerr at Kleiner Perkins, David Strohm at Greylock, and Mike Levinthal Mayfield, for three companies–one of which we took public (Symantec (SYMC)) and one of which we merged public. Plus one IPO from a startup that was bootstrapped with no outside capital (Ashton-Tate). I’ve invested in leading VC firms and also built a VC firm, Irvine Ventures. I’ve made some 40 angel and mezzanine investments in private companies (including INFN, AMRS, Bloom Energy, Ask Jeeves).
I have been immersed in Regulation A+ for two years through my company, Manhattan Street Capital. Through these experiences, I am reasonably well positioned to observe how Reg A+ works versus VC.
I have observed that a number of companies that are viable candidates for VC are instead opting for Reg A+. I see Reg A+ emerging as the superior choice in the following circumstances:
Venture capital is local. If your company is far away from a VC hub like Silicon Valley, Boston, LA or New York, VC is largely unavailable. Reg A+ is genuinely agnostic about location (as long as the company is headquartered in the US or Canada). This democratic access to capital is a huge plus for many excellent businesses and talented entrepreneurs.
Customer Traction and the Credibility It Brings
In the case of companies that appeal strongly to consumers, the inherent Reg A+ process of marketing to thousands of investors has additive effects on the company and its brand. Throngs of happy shareholders makes for happy customers and vice versa. (We can ask public companies about that phenomenon.)
Funding for linear companies producing just 30X return over 6 years
VC firms are interested in companies poised to deliver a 100X return in about 6 years. A 30X level of return is pretty compelling for many individual investors. In my view, this may be one of the biggest Regulation A+ wins, as it will support and grow a new class of companies targeting attractive markets that can deliver solid returns that don’t appeal to VC’s.
For successful mid-sized companies, VC money is rarely an option unless they were already VC funded in an earlier round. There is also the case of mid-stage companies whose VCs have no more capacity to invest but have a great deal of interest in getting liquidity. In these cases, Reg A+ is a uniquely good option that offers a fresh and less costly approach than reverse mergers. Getting access to growth capital for a $50 million business growing 40% per year, at a favorable valuation and with investor liquidity is a true symphony.
Early, Low-Cost IPO
While Reg A+ can be used as a direct method of taking a company public, venture capital cannot.
Along with the efficiency of dealing with VC partners comes the mixed bag of concentrated investor power. VCs are practiced at replacing errant CEOs. This can be a Godsend for a struggling company. On the other hand, some founders would rather not put their strategy and role at risk. With Reg A+, founders reduce the likelihood that they will lose control of their companies.
Liquidity for Investors and Employees
Reg A+ is a more liquid investment than traditional funding, as Reg A+ shares can be traded through brokers or on markets such as the OTCQB and OTCQX exchanges. If investors or employees need liquidity, Reg A+ can deliver it much earlier (within reason).
It is important to note that while Reg A+ is advancing quickly, this is still early days. To frame that, 23 one Reg A+ offerings have raised $246 mill of capital successfully through January 2017, going back to October 2015 when the first deals closed. One company raised $10 mill $10 mill in 5 days raising capital raising capital from individual investors.
In short, Reg A+ presents entrepreneurs with a level playing field for access to capital, based on merit, through which to raise up to $50 million per company per year – which is sizable growth capital – and it does so in a cost efficient and flexible manner.
Venture capital as we know it will adapt and evolve, and a lot of the change I expect to see will come from Reg A+ filling gaps in the capital formation landscape that VC was not addressing effectively, as you can see above. Reg A+ is improving the efficiency of the growth capital markets. Scores of companies that couldn’t raise capital in the old context will now prosper, boosting US economic activity and employment.
The result: Venture capital is getting a little squeezed around the edges. And this is a good thing.