March 6, 2025 • 32 mins
This episode breaks down the critical decision-making process for entrepreneurs considering an IPO or seeking venture capital, providing compelling insights into how to evaluate the options available. Key points include:
• Importance of IPO vs. venture capital decisions
• Outlining the benefits of going public
• Understanding costs associated with both options
• Realizing the hidden advantages of an IPO
• Insights into the venture capitalist landscape
• Discussing timing and preparation for IPO readiness
Listen for expert advice tailored to business owners looking to elevate their growth strategies.
Visit us at:
Bsalesgroup.com
DesignMySale.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Announcer (00:05):
Hello and welcome to M&A.
Murders and Accusations, thegood, the bad and the ugly of
selling your business.
We dig into what you need toknow and how not to kill the
sell of your business.
Now here's our host, Rick JKrebs, mergers and Acquisitions
Advisor.
Rick Krebs (00:24):
Hello everyone and welcome.
This is Rick J Krebs, the M&ACowboy coming to you from
Arizona this time.
We're spending a little timehere in the sun and I am way
excited about our next guest.
Our guest today is a gentlemannamed Paul Hickey.
Welcome, paul, thank you.
(00:44):
It's good to be here and it'sgood to have you.
So, before we get started, whatI'd like to do is I'd like to
hear a little bit about you, alittle bit about your background
, and I want to hear about yourbackground literally.
We're looking at an island here, so tell me about that first,
paul.
What is that island?
Paul Hickey (01:02):
Well, it's an island that I own most of out in
Southeast Asia, off thenorthern tip of Borneo, malaysia
.
It's a little bit of a longstory how I ended up with this,
so I'll try to keep it short.
But I was an investment bankerdoing deals in China.
I was taking small cap Chinesecompanies public in the US and I
(01:24):
was traveling and spending alot of time there and I thought,
well, it'd be nice to get alittle private island, put a
couple of villas and then sendmy Chinese clients there as a
perk of doing business with us.
So that's what I did.
I acquired this property andthen we ended up not developing
it.
I stopped doing business inChina and so right now we're
(01:46):
looking for developers that wantto do nice little green
boutique resorts to partner with, if anybody out there is
interested.
It's an unbelievable piece ofproperty.
It's a reef all the way aroundit, it's untouched virgin white
sand, it's outside of thetsunami belt and typhoon belt,
so it's really uniquelypositioned and just stunning.
(02:07):
I just don't do business overin that part of the world
anymore, so we're trying to findsome people that want to go out
and do something interesting onthe island.
Rick Krebs (02:17):
And for the listeners you're missing out.
Because this island isbeautiful, I'm ready to just
grab my snorkel gear and get aplane ticket and go out there
because I'm looking at the reef.
It's just great snorkeling andgood for you.
What a neat story.
Paul Hickey (02:31):
This is a particular island where
literally any part of the islandyou can just walk from the
beach right into the water withyour snorkeling mask, and the
reef is just right there.
So if you want to get a groupof your clients together and do
a camping trip, you're welcometo head out and do a little
camping snorkeling.
Rick Krebs (02:48):
There we go.
It's primitive, gilligan'sIsland style, totally, totally,
yeah, love it.
So tell us, paul, how did youget started with what you do?
And before we do, let me give alittle background.
So Paul does IPOs, so small capIPOs and I'm not in that space
(03:11):
very much, but we have clientsonce in a while that want to
take their business and grow itand make it public, and so Paul
does that, and so that's whyI've invited him on the show
today.
So how did you get started withwhat you do, paul?
Paul Hickey (03:24):
Well, I started a technology company back in the
90s in Provo, utah, called QCom,and we created some proprietary
hardware and software for theprepaid calling card industry.
I don't know, you probablyremember that A lot of people
listening to this program maynot even know what that is.
Prepaid calling cards andprepaid wireless and mobile is
(03:47):
still pretty dominant in most ofthe world, especially the
developing world.
But so we built this littlemachine that looked like a
credit card terminal and you putit into 7-Elevens and somebody
would walk in and ask for aprepaid calling card and our
machine would print one out ondemand and it did really well.
We ended up placing that inthousands of retail stores
(04:07):
around the country and grew likecrazy and did our own IPO.
I took the company from all theway, from startup as a CEO and
controlling shareholder all theway through an IPO, ringing the
opening bell at the AmericanStock Exchange.
That was an experience and ahighlight, and while I was doing
(04:32):
the IPO, I was sitting backwatching how much the investment
bankers were making and howmuch harder I was working and I
thought I think I need to dothat someday.
And so, after we did our IPO,we actually got acquired by a
much, much larger company andtaken private a couple of years
later by a Mexican telecomcompany that wanted our
technology for Latin America.
(04:52):
We had started to license thetechnology all over the world to
Canada and Australia and Franceand all over the place and so
they saw that it was a goodopportunity for Latin America.
So, anyway, after that, Iactually got hired to be the CEO
of a Chinese company and movedto Shanghai, was planning to
stay there for three years, butthis leads into what I'm doing
(05:14):
now.
I ended up only staying a yearand I left and co-founded an
investment bank with a partnerof mine, greg Fryhoffner, who at
the time was living and workingin New York and he'd come out
of MBA school, went right towork on Wall Street and had been
there 20 years.
And so, greg, when I was inChina, I was calling Greg,
(05:35):
saying, greg, are you seeingthese small cap Chinese
companies going public in the US?
They're really high qualitydeals, and I think I know more
about investment banking than alot of the guys doing these
deals over here.
So we started this boutiquefirm focused on small cap, and
when I say small cap I'm talkingabout companies that have a
value of about 100 million to abillion dollars in that range.
(05:57):
That was our focus.
Rick Krebs (05:59):
Small cap, right, small cap.
Wow, I work in a space wherewe're, you know, 10, 20 million
and to think of 100 million asbeing small cap, but that is.
Paul Hickey (06:14):
Yeah, that's the way Wall Street defines them.
So there's some people callsmall cap companies now
companies at 300 million to 2billion.
When I was doing investmentbanking deals it at 300 million
to 2 billion.
When I was doing investmentbanking deals, it was 100
million to a billion.
Mid caps are a billion to 10billion.
Large caps are 10 billion tobasically 100 billion and mega
(06:36):
caps are 100 billion or above,essentially somewhere in that
range.
And so that's how I got into thebusiness is taking my own
company public and then startingthis investment bank, and then
we sold the investment bank in2015.
And since then I've helped setup a couple of hedge funds.
I've done some advisory work.
I got involved in raising moneyfor a semiconductor Bitcoin,
(06:57):
asic mining chip andsemiconductor software
technology low power solutioncompany called Granite Mountain
Technology brilliant company.
And then recently what I did isI helped raise and advise an AI
startup company in Salt LakeCity that needed to raise a
couple million dollars, so Ihelped them as an advisor in
(07:19):
that project.
And while I was talking, thiskind of leads to the book in our
topic.
By the way, sorry, I'm justgoing to keep rolling.
No, this is very interesting,keep going.
And so what happened is I wastalking to the venture
capitalists that were interestedin investing in this AI startup
company.
Rick Krebs (07:40):
Hold on a sec, paul.
So we're talking using a lot ofterms here and some of the
listeners may not understandthem.
So tell us what's a venturecapitalist?
Paul Hickey (07:49):
Okay, thank you very much.
I appreciate it.
So a venture capitalist is?
It's a company, a fund thatgets money from limited partners
.
It could be an individual oranother fund, and then they go
out and they invest the money anindividual or another fund, and
then they go out and theyinvest the money.
And venture capital funds havedifferent themes and mandates.
(08:10):
So some venture capital fundsare raising money and telling
their investors we're only goingto invest in software companies
.
And other venture capital fundsmay raise money and say we're
only investing in organic foodcompanies and the food chain
supply technology companies, andso they can be all different
themes and so these venturecapital companies also are
(08:34):
different sizes.
So some may only invest a halfa million to a million dollars
in early stage companies, likethey call them, seed rounds, and
then the pre-seed round isfriends and family 100,000,
50,000, couple hundred thousand,right.
And then the A round venturecapital.
There are funds that do Arounds, which is they'll invest.
(08:55):
You know, five to 10 or 20million is an A round, and then
a B round is like 10 to 50million, and then a C round is
50, 10 to 50 million, and then aC round is 50 million to a
couple of hundred million, andand there are different funds,
focus on different rounds offunding, you know, and different
places where the companies areat as they're growing.
(09:17):
So so that's the venturecapital world and you know, rick
I'm glad you brought that up Alot of entrepreneurs out there
listening who are, you know,growing their business, maybe
thinking of selling it.
I am surprised at how many ofthem are afraid of venture
capitalists and raising moneyfrom venture capitalists.
(09:38):
Of people.
A lot of companies have come tous to go public because they
didn't.
They want to raise money thatway, because they didn't want to
raise it from venturecapitalists.
And I got to tell you a lot ofthose fears are unfounded.
I think that venturecapitalists are vulture
capitalists, so they just wantto invest and then ultimately
take over the company and takecontrol.
That is the last thing venturecapitalists want.
(10:00):
I'll tell you, the dreaminvestment of your typical
venture capitalist is to write acheck and then not even hear
from you for five years untilyou sell the company.
That's what they all want.
They just want you to take themoney, build it, sell it for a
lot of money and make them a lotof money on their investment.
They don't want to be in thererunning your company and
(10:21):
interfering and having to dowork.
That's not what they want to doNow.
They all didn't do that whenthey invest in a company that's
not working out, because they'retrying to save their investment
right.
And so the thing I would say toyour group of entrepreneurs
listening to this is be a littlemore open-minded and at least
try and get in front of someventure capitalists and see what
(10:42):
that experience is like.
I think you're going to findthat they're way more supportive
than you think and that maybeit what's in your mind and you
know, are they easy to work with?
Yeah, if you know what theywant.
If you're brand new to workingwith venture capitalists, it's
going to seem like a lot of work, but that's part of kind of
(11:02):
growing up.
Like a lot of work, but that'sthat's part of kind of growing
up.
You know, as an entrepreneur is.
If you can, if you can raise around of money from from a
venture capitalist, then you'reyou're on the right path of
doing big things, I think.
Rick Krebs (11:16):
Yeah, you know what that's interesting?
Cause I work with privateequity and private equity invest
.
But they buy the businessesright.
They buy them usually entirely.
Sometimes they'll do itminority interest, but most of
them are buying the business.
Venture capitalists areinvesting in the business Right.
And what did you say?
Pre-seed seed A, b, c, sothere's a lot of different
(11:36):
levels at which they can investRight.
And, yeah, that's interestingbecause there is kind of a bad,
bad connotation.
I think there's a few bad onesout there that have given them a
bad reputation, unfortunately,but they're necessary and
they're and they're helpful tothese business owners that are
looking to take their, theircompanies, public.
Yeah, that's very interesting.
Paul Hickey (11:56):
thank you yeah, yeah, I know, once they make, uh
, a decision and write a checkand they're investing, they're
on your side.
They're trying to do whateverthey can to support you and help
you be successful, becausethat's how they make their money
, you know, yeah.
Rick Krebs (12:08):
Yeah, interesting, yeah, all right.
So I've got a couple ofquestions.
So what is it?
Oh, we covered a small cap IPO.
So you're writing a book, paul,tell us about this book.
Paul Hickey (12:19):
Okay, yeah, I wrote this book.
Oh it's done.
There we go.
Oh, yeah, let's see, wow, ipoversus VC, right, and I've got a
bull and a fox on the frontthere.
And this book was actuallyinspired by the story I was just
telling you about helping thisAI startup in Salt Lake raise
(12:41):
money.
A couple of years ago, I wastalking to venture capitalists
and I was saying how manyportfolio companies those are
the companies they've investedin are getting ready for an IPO.
Rick Krebs (12:50):
And.
Paul Hickey (12:51):
I asked that question to probably five or six
different venture capitalistsin the Salt Lake City area that
I was working with and everysingle one of them said the same
thing oh, I don't have anycompanies in my portfolio
getting ready for an IPO.
I don't have any companies inmy portfolio getting ready for
an IPO.
And then I would say, well, doyou have any companies doing 50
(13:12):
or a hundred million dollars inrevenue?
And they said yes.
And I said, oh well, you know,they're big, they're.
They're big enough for a smallcap IPO.
They could probably get avaluation of you know, 200, 300,
400, $500 million and probablyraise 50 or a hundred million
dollars and and become public.
And the response I got fromevery single one of them was
really surprising.
It was almost like I startedspeaking Chinese to them.
(13:35):
They're like a small IPO.
I I didn't know you could gopublic that soon, and isn't it
too expensive?
And that was their common alsoresponse it's too expensive to
be public as a $200 or $300million company.
And then what I would do, rick,is I'd say do you know how
(13:56):
expensive it is to stay private?
Do you know what theopportunity cost is?
And that's what got theirattention.
They're like what do you mean?
And so this is why I wrote thebook and I titled it IPO versus
VC.
I'm speaking to theentrepreneurs out there who also
think it's too expensive to gopublic when you're a $500, $200
(14:17):
million company, and I'mspeaking to the VCs to go hey
guys, there's another optionhere.
There's another option herebecause a lot of VCs complain
about liquidity, meaning they'veinvested in a company and
they're waiting for them toeither go public or to be
acquired so that they can get areturn on their investment.
Right, and it's called aliquidity event.
And a lot of venturecapitalists have to wait
(14:39):
generally at least five years,but a lot of times it's 10 years
or longer and they're waitingtoo long.
They could get liquidity ifthey get these companies out the
door in a small cap market.
So anyway, that's.
That's the reason I wrote thisbook, which, by the way, hit
number one bestseller on Amazonin two different categories
venture capital and publicfinance.
Rick Krebs (15:01):
Interesting and and listeners can find it on Amazon
right now.
Yeah, you just go to.
Paul Hickey (15:05):
Amazon and punch in IPO versus VC and there's a
paperback or an e-book version.
Rick Krebs (15:13):
IPO versus VC.
That's from Paul Hickey.
That's it.
Yeah, Gotcha.
Well, that's really cool, Paul.
So with these small caps, smallcaps lost favor a little bit.
Why do you think they lostfavor?
Yeah?
Paul Hickey (15:26):
you know, when I was doing investment banking
back in 2005 to 2015, a couplethings happened and they were in
big favor.
Back then, there was maybe 400or 500 small cap IPOs a year
back then.
Now there's a couple hundred.
I think they're going to comeback.
We'll talk about that in aminute.
But the reason is around 2011,there was about $20 billion of
(15:53):
venture capital money investedevery year by 2021, that was
over $200 billion 10x the amountof venture capital money to
invest in these companies 10x inliterally 10 years.
And so when you have that muchmoney, you can't deploy it as a
venture capital company or firmby writing $500,000 checks and
(16:15):
million dollar checks.
You got to start writing biggerchecks, and that never existed
back in 2005.
You weren't getting venturecapitalists writing 50 and $
million dollar checks, but nowyou do, and so if you're a
company that's got a, let's say,a valuation of 300 million
dollars and you want to raise 50million bucks, well, you could
(16:40):
do that in a small cap IPO.
It's going to take you about a?
year.
It's a lot of work, but if youwant to raise it from venture
capitalists and you've alreadyraised an A B round and so
you've got all your documentsand everything, you might be
able to do that in three or fourmonths if you've got interested
investors raising it fromventure capital an IPO.
(17:01):
So that's why a lot ofcompanies are.
That's why IPOs, small cap IPOskind of fell out of favor.
One of the main reasons isbecause it was just easier to
raise 50 or a hundred millionbucks from venture capitalists
when that didn't exist in the2000s.
Right, it was very rare.
So, yeah, that's one of thereasons.
And you know SOX, which isArbanOxley Act.
(17:23):
This was an act passed byCongress to require more
reporting to public companies sothere was less chance of fraud.
That increased the cost ofgoing public and remaining
public, so that kind of had alittle dampening effect also.
Rick Krebs (17:39):
So I'm a business owner.
I'm looking to do a small capIPO.
What am I looking at Justballpark on cost to do it?
Yeah, you're going to spend $1to $.
What am I looking at Justballpark on cost to do it.
Paul Hickey (17:46):
Yeah, you're going to spend one to two million
dollars.
Now that sounds like a lot to asmall company that's maybe
doing 50 or 100 million dollarsin revenue, but when you think
about the fact that you're goingto be able to raise 50 million
dollars at a good valuation anduse that money to grow, because
once you're public as a smallcap company, it's also going to
(18:07):
cost about one to $2 million inlegal fees and filing fees and
you're being on listing onNASDAQ and your DNO, insurance
and your board and your investorrelations.
You know those are all newexpenses and if you manage them
really well, you can probably doit for about a million dollars
a year and so.
(18:28):
But it can cost you moredepending on how big your
company is and what you want todo in terms of all the things
that require expenses.
But what most people don'tunderstand and this is the big
message to the founders and VCsis how expensive it is not to be
public.
Rick Krebs (18:47):
So I love that.
Hold on one second.
So a lot of people are askingwell, what's the cost?
Right, but that's the wrongquestion.
It is what is lost by not doing.
It's not the cost, it's what islost.
And as I work with thesebusiness owners, I find the
difference between people thatare hyper, that are just super
successful, and those that arejust limp along are the
(19:08):
questions that they ask.
And the limp alongs are alwaysasking well, how much does it
cost?
No, what value does it bring?
Or what do I lose by not doingit?
I love that notion, so go ahead.
I interrupted you, but I justthink that's such an important
point to talk about.
It is.
Paul Hickey (19:22):
It is, and it's a major thesis.
Rick of the book and evenventure capitalists, who were
very smart people, are notanalyzing this the right way.
They're not looking at theopportunity costs, and I kind of
hammer away at that in the bookmultiple times.
But let me just give you anexample of one of the things you
give up by not being public,and one of the things you gain
(19:43):
if you do go public is a highervaluation.
It's called liquidity premium,and so the idea is, if you're an
investor and you have thechoice to invest in two
companies they're the same size,they're in the same industry,
everything's the same one'sprivate and one's public you
make an investment in theprivate company.
You may not be able to get anyliquidity or return on your
(20:05):
investment for five years or 10years, but you invest in the
public company.
You can invest today and sellyour stock tomorrow.
So you have that liquidity andpeople are willing to pay a
premium for liquidity.
So that's one of the reasons.
There's several other reasonswhy public companies have a
higher valuation than theirprivate counterparts, but on
(20:28):
average it's about 50 percenthigher, and so think about that
for a minute.
If you're a private companywith a valuation of 300 million
and you're going to raise, youknow, 50 million dollars, or
let's just call it 100 milliondollars dollars, or let's just
call it a hundred milliondollars.
(20:48):
Now you're diluting yourself.
Based on a $300 millionvaluation, versus, if you're a
public company, chances are yourvaluation is going to be 400 or
$500 million because of theliquidity premium.
So by staying private, you'reliterally it's costing you a
hundred to $200 million in valuein your company.
Rick Krebs (21:06):
Wow, what?
Yeah, I see that People.
It's counterintuitive, right.
They think the bigger you are,the less investors there are,
and that's the opposite.
So when you have a publiclytraded companies, there's a lot
bigger pool of investors andit's pushing that price up.
They think, no, I'm bigger, sothere'll be less money.
Not the case with Wall Streetthe bigger you are, the more
(21:29):
money there is.
Paul Hickey (21:30):
It's literally the opposite.
There's an inverse pyramid, Yep, exactly, and the smaller you
are, the less money there is foryou, and the bigger you are,
the more money there is for you.
Right, and that's the way itworks.
And you know, the small cappublic market is $4 trillion.
It has $4 trillion worth ofvalue and that's $4 trillion of
(21:53):
liquid money, and so it's not asmall market to be playing in,
so there's plenty of money forthese small cap companies.
So, you know, this is the wholeidea of when you do your
analysis.
As a private company, yes, it'sgoing to cost you $1 to $2
million to go public, and costyou $100 to $200 million to stay
(22:15):
private, Right?
So, wow, let's let's look atall those factors you know, and
there's a couple more that arekey ones to hit on, In fact.
So I have nine benefits thatyou get by being a public
company versus staying as aprivate company.
Those are benefits that arereally helpful in growing your
(22:38):
business, and each one of themare an opportunity cost if you
don't have them as a privatecompany, right.
So you know, we can talk aboutthose, but you know, I would say
, just before we jump into that,I would say for your listeners
out there how big do you need tobe before you start?
Considering that there's afamous venture capitalist in
(22:59):
Silicon Valley right now.
His name's Keith Raboy and heis a managing partner at the
Founders Fund.
That is Peter Thiel's fund.
It's one of the most successfulfund.
Peter Thiel is one of thesmartest guys on the planet.
He was the first institutionalinvestor in Facebook and he's
just extremely well.
And Keith is one of the guys outthere in the venture capital
(23:20):
community in Silicon Valleysaying you need to go public as
soon as possible, and he's notone of these VCs who think you
need to be a multi-billiondollar company before you go an
IPO.
He actually says if you've got$50 million in revenue, you
should start looking at doing anIPO, a small cap IPO, and the
reason he says that is he likesbecause you get more value.
He likes the transparency itrequires.
(23:42):
It requires responsibility.
You know responsibility andreporting and some structure and
discipline that you don't haveto have as a private company.
So, yeah, it's a little morework, but that's one of the
reasons you get a highervaluation and you get attract
more money and investors becauseof all those things, and so
he's helping the VC community.
(24:02):
Wake up to this, you know.
And again, hopefully my bookhelps to some extent.
Rick Krebs (24:06):
There you go, Move the needle right.
So you're saying probably 50million in sales.
When you're 50 million in sales, that's time to start looking
at an IPO and preparing for it.
Paul Hickey (24:15):
Yep, you can start.
And here's the other factor.
This is really important forsmall cap companies in terms of
determining whether you're acandidate to start really
considering, you need to havevery predictable growth for at
least two years from the timeyou do your IPO.
Small cap companies are allabout growth.
That's why the public investsin small cap companies.
(24:36):
It's because they have a lot ofgrowth potential.
Actually, I have a question foryou and your audience here to
answer.
Out of these companies, whichone of them was a small cap
company when they did their IPOApple, Microsoft, Amazon, Tesla
(24:57):
or PayPal?
Rick Krebs (24:59):
Wow.
Well, I'm going to say it's theone that I don't think it is,
and I want to say Amazon orMicrosoft it's a trick question.
Paul Hickey (25:08):
All of them were small cap companies when they
went public.
Rick Krebs (25:11):
No way.
Paul Hickey (25:12):
Really?
Yes, everybody's forgotten thatthey're the largest companies
in the world and they startedout as Amazon had a $400 million
market cap when they wentpublic.
Rick Krebs (25:25):
Wow, we'd only invested.
Paul Hickey (25:26):
Yeah right, microsoft had $700 million.
And so these companies were allsmall cap companies and again,
the VC community has forgottenabout that.
This is where great companiesare born is in the small cap
market.
You don't have to be amulti-billion dollar company to
do an IPO.
So, anyways, the venturecapital world, I hope, is waking
(25:48):
up.
But you need to have good growthas a small cap company.
So if your company is, ifyou're doing $100 million in
revenue and your revenue andsales are stalling, you're not a
good company to be a publiccompany.
You'll get crushed as a smallcap public company.
So really predictable.
And a lot of entrepreneurs saywell, what kind of growth rate?
(26:09):
Well, it depends on theindustry you're in in the
segment and it depends on thecomparables.
So you want to look at thepublic companies that are your
competitors and in your sectorand look at their growth rates.
And if you're at their growthrate or above, then you're
probably a good candidate forgoing public.
But you know general rule ofthumb you got to be growing 20,
30 plus percent a year at leastif you're going to get anybody's
(26:32):
attention as a small cap publiccompany.
So, at least 50 million inrevenue 100 million is probably
better, and you got to havereally feel very confident about
your growth for at least twoyears after you're public.
Now, once you get your 50, 100,$200 million in the IPO, you
can use that to really ramp upyour growth and even accelerate
it, which is one of the mainreasons you do it right.
Rick Krebs (26:57):
Interesting.
This is a world that I'm not in, but it's fascinating to me,
and so, as the listeners havequestions, how can they contact
you, paul?
How do they get answers totheir questions?
Paul Hickey (27:09):
Yeah, I have a website and, by the way, I want
to circle back to what I do now.
You introduced me, so I am notan investment banker any longer.
I don't actually raise themoney and do the IPOs.
I do what's called IPO prepwork.
So if you decide you want to gopublic, there's a lot you need
(27:30):
to do for a year to get ready,and one of the things I do is I
connect you with the bestinvestment bank depending on
your size industry there'sdifferent small cap investment
banks that I've worked with overthe years.
I'll connect you with the rightauditing firm based on your
size and your industry, theright law firm.
You got to make sure you getthe right lawyers and auditors
(27:50):
and professionals on board,helping put together an
independent board that you'regoing to need to have as a
public company, and so there's anumber of things that I do as
an advisor to help them do thisthe right way and to make sure
that it's successful.
And then, in addition to that,I work with a wealth management
company successful.
And then, in addition to that,I work with a wealth management
(28:11):
company Legacy Wealth Managementand so, obviously, once you do
the IPO, most entrepreneurs arenow sitting on $100, $200, $300,
$500 million worth of liquidstock.
This is another benefit forgoing public is you get what I
call a flexible exit.
So if you're building yourbusiness and you sell it, you're
(28:33):
done.
You might have an earn out, butit's pretty much done and as
that business grows you're notgoing to participate, typically
in the future growth.
When you do an IPO, you can sella little at the IPO.
You want to take some money offthe table and sell five or 10%
of your position.
Let's say your position isworth $200 million.
(28:53):
Now, after you go public, it'snot unusual to take $20 million
off the table and diversify.
Wall Street understands theimportance of that.
And then maybe this thing goesand doubles over the next two or
three years and now it's worth$400 million.
It's okay to take another 10%or whatever your needs are to
diversify.
So you have the options.
(29:14):
You could actually set up aselling plan to sell like 1% of
your stock every month as a wayto diversify and to take some
money off the table.
So there's lots of flexibilityin exiting.
You can have a big chunk.
You sell at IPO.
You can sell nothing.
You have ultimate flexibility,which is another real key
(29:34):
benefit, not only for thefounders but also for the
investors, the venturecapitalists, because they can
get liquidity, which they want,or they can hang on if they
really think this is the nextAmazon, they can hang on to
their investment and maybe 10exit again, but have the option
to sell anytime they want.
Right, and so that's that's.
Another big benefit is justliquidity that you get.
(29:57):
Everybody benefits fromliquidity and I'll tell you one
of the other benefits, rick,here is as a public company
versus private, and this is ahard one to put a number on.
You know valuation premium, wecan put a number on that.
But recruiting talent if you'rea growing company, probably the
most important thing you do asan owner, founder, slash, ceo is
(30:18):
recruit the best talent you canget your hands on, because
companies are just people andespecially if you're growing
really fast, you need the bestpeople you can get your hands on
.
Now, if you have two companiesthat are trying to recruit the
same person and one of them isoffering stock options in a
private company that sometime inthe future and years may be
worth something, or you're apublic company that has liquid
(30:41):
stock that is able to be soldliterally as soon as they earn
it.
Who's going to win in thatcontest?
For that person, it's thepublic company.
Public company stock optionsare really valued by you know,
high level, talented people andyou know obviously, if you go
(31:01):
and get some stock options at aprivate company and they go
public, it can be worth a lotand you can do really well and a
lot of people have.
But if you're competing fortalent and you're a public
company and have that option tooffer stock options that are
with a public company and haveliquidity versus a private
company, you win as a publiccompany assuming all things also
are equal, right.
So it's another big benefit andanother huge cost.
(31:24):
As a private company, you'relosing people that you don't
even know.
You're losing because they'renot even coming to you, right?
Announcer (31:30):
They're going to the public companies first.
Paul Hickey (31:32):
Right.
So another big reason to gopublic.
Rick Krebs (31:36):
Yeah, interesting.
Well, this has been reallygreat today.
Paul, thank you for sharing,and I'm going to tell the
listeners about the book.
Where can they find you and howdo they get in touch with you?
Questions, yeah.
Paul Hickey (31:49):
So they can go to my website, which is six
summitsco, ceo, and it's spelledout S I X, s, u, m, m I T S six
summitsco.
That's my IPO prep and on therethere's a place to reach out
and get ahold of me on thewebsite and they can email me
and then I'll be happy to talkto them about the possibilities
(32:12):
of them doing a small cap IPO.
Rick Krebs (32:15):
All right, well, sounds good.
There you have it.
Thank you to the listeners andeveryone.
Have a great day.
Thanks for having me on Rick.
Announcer (32:24):
Thank you for attending our podcast.
We invite you to join us forfuture episodes of M&A, murders
and Accusations, the good, thebad and the ugly of selling your
business.
You can also visit us atwwwbsalesgroupcom or email Rick
directly at rick atbsalesgroupcom.
Hello and welcome to M&A.
Murders and Accusations, thegood, the bad and the ugly of
selling your business.
We dig into what you need toknow and how not to kill the
sell of your business.
Now here's our host, Rick JKrebs, mergers and Acquisitions
Advisor.
Rick Krebs (00:24):
Hello everyone and welcome.
This is Rick J Krebs, the M&ACowboy coming to you from
Arizona this time.
We're spending a little timehere in the sun and I am way
excited about our next guest.
Our guest today is a gentlemannamed Paul Hickey.
Welcome, paul, thank you.
(00:44):
It's good to be here and it'sgood to have you.
So, before we get started, whatI'd like to do is I'd like to
hear a little bit about you, alittle bit about your background
, and I want to hear about yourbackground literally.
We're looking at an island here, so tell me about that first,
paul.
What is that island?
Paul Hickey (01:02):
Well, it's an island that I own most of out in
Southeast Asia, off thenorthern tip of Borneo, malaysia
.
It's a little bit of a longstory how I ended up with this,
so I'll try to keep it short.
But I was an investment bankerdoing deals in China.
I was taking small cap Chinesecompanies public in the US and I
(01:24):
was traveling and spending alot of time there and I thought,
well, it'd be nice to get alittle private island, put a
couple of villas and then sendmy Chinese clients there as a
perk of doing business with us.
So that's what I did.
I acquired this property andthen we ended up not developing
it.
I stopped doing business inChina and so right now we're
(01:46):
looking for developers that wantto do nice little green
boutique resorts to partner with, if anybody out there is
interested.
It's an unbelievable piece ofproperty.
It's a reef all the way aroundit, it's untouched virgin white
sand, it's outside of thetsunami belt and typhoon belt,
so it's really uniquelypositioned and just stunning.
(02:07):
I just don't do business overin that part of the world
anymore, so we're trying to findsome people that want to go out
and do something interesting onthe island.
Rick Krebs (02:17):
And for the listeners you're missing out.
Because this island isbeautiful, I'm ready to just
grab my snorkel gear and get aplane ticket and go out there
because I'm looking at the reef.
It's just great snorkeling andgood for you.
What a neat story.
Paul Hickey (02:31):
This is a particular island where
literally any part of the islandyou can just walk from the
beach right into the water withyour snorkeling mask, and the
reef is just right there.
So if you want to get a groupof your clients together and do
a camping trip, you're welcometo head out and do a little
camping snorkeling.
Rick Krebs (02:48):
There we go.
It's primitive, gilligan'sIsland style, totally, totally,
yeah, love it.
So tell us, paul, how did youget started with what you do?
And before we do, let me give alittle background.
So Paul does IPOs, so small capIPOs and I'm not in that space
(03:11):
very much, but we have clientsonce in a while that want to
take their business and grow itand make it public, and so Paul
does that, and so that's whyI've invited him on the show
today.
So how did you get started withwhat you do, paul?
Paul Hickey (03:24):
Well, I started a technology company back in the
90s in Provo, utah, called QCom,and we created some proprietary
hardware and software for theprepaid calling card industry.
I don't know, you probablyremember that A lot of people
listening to this program maynot even know what that is.
Prepaid calling cards andprepaid wireless and mobile is
(03:47):
still pretty dominant in most ofthe world, especially the
developing world.
But so we built this littlemachine that looked like a
credit card terminal and you putit into 7-Elevens and somebody
would walk in and ask for aprepaid calling card and our
machine would print one out ondemand and it did really well.
We ended up placing that inthousands of retail stores
(04:07):
around the country and grew likecrazy and did our own IPO.
I took the company from all theway, from startup as a CEO and
controlling shareholder all theway through an IPO, ringing the
opening bell at the AmericanStock Exchange.
That was an experience and ahighlight, and while I was doing
(04:32):
the IPO, I was sitting backwatching how much the investment
bankers were making and howmuch harder I was working and I
thought I think I need to dothat someday.
And so, after we did our IPO,we actually got acquired by a
much, much larger company andtaken private a couple of years
later by a Mexican telecomcompany that wanted our
technology for Latin America.
(04:52):
We had started to license thetechnology all over the world to
Canada and Australia and Franceand all over the place and so
they saw that it was a goodopportunity for Latin America.
So, anyway, after that, Iactually got hired to be the CEO
of a Chinese company and movedto Shanghai, was planning to
stay there for three years, butthis leads into what I'm doing
(05:14):
now.
I ended up only staying a yearand I left and co-founded an
investment bank with a partnerof mine, greg Fryhoffner, who at
the time was living and workingin New York and he'd come out
of MBA school, went right towork on Wall Street and had been
there 20 years.
And so, greg, when I was inChina, I was calling Greg,
(05:35):
saying, greg, are you seeingthese small cap Chinese
companies going public in the US?
They're really high qualitydeals, and I think I know more
about investment banking than alot of the guys doing these
deals over here.
So we started this boutiquefirm focused on small cap, and
when I say small cap I'm talkingabout companies that have a
value of about 100 million to abillion dollars in that range.
(05:57):
That was our focus.
Rick Krebs (05:59):
Small cap, right, small cap.
Wow, I work in a space wherewe're, you know, 10, 20 million
and to think of 100 million asbeing small cap, but that is.
Paul Hickey (06:14):
Yeah, that's the way Wall Street defines them.
So there's some people callsmall cap companies now
companies at 300 million to 2billion.
When I was doing investmentbanking deals it at 300 million
to 2 billion.
When I was doing investmentbanking deals, it was 100
million to a billion.
Mid caps are a billion to 10billion.
Large caps are 10 billion tobasically 100 billion and mega
(06:36):
caps are 100 billion or above,essentially somewhere in that
range.
And so that's how I got into thebusiness is taking my own
company public and then startingthis investment bank, and then
we sold the investment bank in2015.
And since then I've helped setup a couple of hedge funds.
I've done some advisory work.
I got involved in raising moneyfor a semiconductor Bitcoin,
(06:57):
asic mining chip andsemiconductor software
technology low power solutioncompany called Granite Mountain
Technology brilliant company.
And then recently what I did isI helped raise and advise an AI
startup company in Salt LakeCity that needed to raise a
couple million dollars, so Ihelped them as an advisor in
(07:19):
that project.
And while I was talking, thiskind of leads to the book in our
topic.
By the way, sorry, I'm justgoing to keep rolling.
No, this is very interesting,keep going.
And so what happened is I wastalking to the venture
capitalists that were interestedin investing in this AI startup
company.
Rick Krebs (07:40):
Hold on a sec, paul.
So we're talking using a lot ofterms here and some of the
listeners may not understandthem.
So tell us what's a venturecapitalist?
Paul Hickey (07:49):
Okay, thank you very much.
I appreciate it.
So a venture capitalist is?
It's a company, a fund thatgets money from limited partners
.
It could be an individual oranother fund, and then they go
out and they invest the money anindividual or another fund, and
then they go out and theyinvest the money.
And venture capital funds havedifferent themes and mandates.
(08:10):
So some venture capital fundsare raising money and telling
their investors we're only goingto invest in software companies
.
And other venture capital fundsmay raise money and say we're
only investing in organic foodcompanies and the food chain
supply technology companies, andso they can be all different
themes and so these venturecapital companies also are
(08:34):
different sizes.
So some may only invest a halfa million to a million dollars
in early stage companies, likethey call them, seed rounds, and
then the pre-seed round isfriends and family 100,000,
50,000, couple hundred thousand,right.
And then the A round venturecapital.
There are funds that do Arounds, which is they'll invest.
(08:55):
You know, five to 10 or 20million is an A round, and then
a B round is like 10 to 50million, and then a C round is
50, 10 to 50 million, and then aC round is 50 million to a
couple of hundred million, andand there are different funds,
focus on different rounds offunding, you know, and different
places where the companies areat as they're growing.
(09:17):
So so that's the venturecapital world and you know, rick
I'm glad you brought that up Alot of entrepreneurs out there
listening who are, you know,growing their business, maybe
thinking of selling it.
I am surprised at how many ofthem are afraid of venture
capitalists and raising moneyfrom venture capitalists.
(09:38):
Of people.
A lot of companies have come tous to go public because they
didn't.
They want to raise money thatway, because they didn't want to
raise it from venturecapitalists.
And I got to tell you a lot ofthose fears are unfounded.
I think that venturecapitalists are vulture
capitalists, so they just wantto invest and then ultimately
take over the company and takecontrol.
That is the last thing venturecapitalists want.
(10:00):
I'll tell you, the dreaminvestment of your typical
venture capitalist is to write acheck and then not even hear
from you for five years untilyou sell the company.
That's what they all want.
They just want you to take themoney, build it, sell it for a
lot of money and make them a lotof money on their investment.
They don't want to be in thererunning your company and
(10:21):
interfering and having to dowork.
That's not what they want to doNow.
They all didn't do that whenthey invest in a company that's
not working out, because they'retrying to save their investment
right.
And so the thing I would say toyour group of entrepreneurs
listening to this is be a littlemore open-minded and at least
try and get in front of someventure capitalists and see what
(10:42):
that experience is like.
I think you're going to findthat they're way more supportive
than you think and that maybeit what's in your mind and you
know, are they easy to work with?
Yeah, if you know what theywant.
If you're brand new to workingwith venture capitalists, it's
going to seem like a lot of work, but that's part of kind of
(11:02):
growing up.
Like a lot of work, but that'sthat's part of kind of growing
up.
You know, as an entrepreneur is.
If you can, if you can raise around of money from from a
venture capitalist, then you'reyou're on the right path of
doing big things, I think.
Rick Krebs (11:16):
Yeah, you know what that's interesting?
Cause I work with privateequity and private equity invest
.
But they buy the businessesright.
They buy them usually entirely.
Sometimes they'll do itminority interest, but most of
them are buying the business.
Venture capitalists areinvesting in the business Right.
And what did you say?
Pre-seed seed A, b, c, sothere's a lot of different
(11:36):
levels at which they can investRight.
And, yeah, that's interestingbecause there is kind of a bad,
bad connotation.
I think there's a few bad onesout there that have given them a
bad reputation, unfortunately,but they're necessary and
they're and they're helpful tothese business owners that are
looking to take their, theircompanies, public.
Yeah, that's very interesting.
Paul Hickey (11:56):
thank you yeah, yeah, I know, once they make, uh
, a decision and write a checkand they're investing, they're
on your side.
They're trying to do whateverthey can to support you and help
you be successful, becausethat's how they make their money
, you know, yeah.
Rick Krebs (12:08):
Yeah, interesting, yeah, all right.
So I've got a couple ofquestions.
So what is it?
Oh, we covered a small cap IPO.
So you're writing a book, paul,tell us about this book.
Paul Hickey (12:19):
Okay, yeah, I wrote this book.
Oh it's done.
There we go.
Oh, yeah, let's see, wow, ipoversus VC, right, and I've got a
bull and a fox on the frontthere.
And this book was actuallyinspired by the story I was just
telling you about helping thisAI startup in Salt Lake raise
(12:41):
money.
A couple of years ago, I wastalking to venture capitalists
and I was saying how manyportfolio companies those are
the companies they've investedin are getting ready for an IPO.
Rick Krebs (12:50):
And.
Paul Hickey (12:51):
I asked that question to probably five or six
different venture capitalistsin the Salt Lake City area that
I was working with and everysingle one of them said the same
thing oh, I don't have anycompanies in my portfolio
getting ready for an IPO.
I don't have any companies inmy portfolio getting ready for
an IPO.
And then I would say, well, doyou have any companies doing 50
(13:12):
or a hundred million dollars inrevenue?
And they said yes.
And I said, oh well, you know,they're big, they're.
They're big enough for a smallcap IPO.
They could probably get avaluation of you know, 200, 300,
400, $500 million and probablyraise 50 or a hundred million
dollars and and become public.
And the response I got fromevery single one of them was
really surprising.
It was almost like I startedspeaking Chinese to them.
(13:35):
They're like a small IPO.
I I didn't know you could gopublic that soon, and isn't it
too expensive?
And that was their common alsoresponse it's too expensive to
be public as a $200 or $300million company.
And then what I would do, rick,is I'd say do you know how
(13:56):
expensive it is to stay private?
Do you know what theopportunity cost is?
And that's what got theirattention.
They're like what do you mean?
And so this is why I wrote thebook and I titled it IPO versus
VC.
I'm speaking to theentrepreneurs out there who also
think it's too expensive to gopublic when you're a $500, $200
(14:17):
million company, and I'mspeaking to the VCs to go hey
guys, there's another optionhere.
There's another option herebecause a lot of VCs complain
about liquidity, meaning they'veinvested in a company and
they're waiting for them toeither go public or to be
acquired so that they can get areturn on their investment.
Right, and it's called aliquidity event.
And a lot of venturecapitalists have to wait
(14:39):
generally at least five years,but a lot of times it's 10 years
or longer and they're waitingtoo long.
They could get liquidity ifthey get these companies out the
door in a small cap market.
So anyway, that's.
That's the reason I wrote thisbook, which, by the way, hit
number one bestseller on Amazonin two different categories
venture capital and publicfinance.
Rick Krebs (15:01):
Interesting and and listeners can find it on Amazon
right now.
Yeah, you just go to.
Paul Hickey (15:05):
Amazon and punch in IPO versus VC and there's a
paperback or an e-book version.
Rick Krebs (15:13):
IPO versus VC.
That's from Paul Hickey.
That's it.
Yeah, Gotcha.
Well, that's really cool, Paul.
So with these small caps, smallcaps lost favor a little bit.
Why do you think they lostfavor?
Yeah?
Paul Hickey (15:26):
you know, when I was doing investment banking
back in 2005 to 2015, a couplethings happened and they were in
big favor.
Back then, there was maybe 400or 500 small cap IPOs a year
back then.
Now there's a couple hundred.
I think they're going to comeback.
We'll talk about that in aminute.
But the reason is around 2011,there was about $20 billion of
(15:53):
venture capital money investedevery year by 2021, that was
over $200 billion 10x the amountof venture capital money to
invest in these companies 10x inliterally 10 years.
And so when you have that muchmoney, you can't deploy it as a
venture capital company or firmby writing $500,000 checks and
(16:15):
million dollar checks.
You got to start writing biggerchecks, and that never existed
back in 2005.
You weren't getting venturecapitalists writing 50 and $
million dollar checks, but nowyou do, and so if you're a
company that's got a, let's say,a valuation of 300 million
dollars and you want to raise 50million bucks, well, you could
(16:40):
do that in a small cap IPO.
It's going to take you about a?
year.
It's a lot of work, but if youwant to raise it from venture
capitalists and you've alreadyraised an A B round and so
you've got all your documentsand everything, you might be
able to do that in three or fourmonths if you've got interested
investors raising it fromventure capital an IPO.
(17:01):
So that's why a lot ofcompanies are.
That's why IPOs, small cap IPOskind of fell out of favor.
One of the main reasons isbecause it was just easier to
raise 50 or a hundred millionbucks from venture capitalists
when that didn't exist in the2000s.
Right, it was very rare.
So, yeah, that's one of thereasons.
And you know SOX, which isArbanOxley Act.
(17:23):
This was an act passed byCongress to require more
reporting to public companies sothere was less chance of fraud.
That increased the cost ofgoing public and remaining
public, so that kind of had alittle dampening effect also.
Rick Krebs (17:39):
So I'm a business owner.
I'm looking to do a small capIPO.
What am I looking at Justballpark on cost to do it?
Yeah, you're going to spend $1to $.
What am I looking at Justballpark on cost to do it.
Paul Hickey (17:46):
Yeah, you're going to spend one to two million
dollars.
Now that sounds like a lot to asmall company that's maybe
doing 50 or 100 million dollarsin revenue, but when you think
about the fact that you're goingto be able to raise 50 million
dollars at a good valuation anduse that money to grow, because
once you're public as a smallcap company, it's also going to
(18:07):
cost about one to $2 million inlegal fees and filing fees and
you're being on listing onNASDAQ and your DNO, insurance
and your board and your investorrelations.
You know those are all newexpenses and if you manage them
really well, you can probably doit for about a million dollars
a year and so.
(18:28):
But it can cost you moredepending on how big your
company is and what you want todo in terms of all the things
that require expenses.
But what most people don'tunderstand and this is the big
message to the founders and VCsis how expensive it is not to be
public.
Rick Krebs (18:47):
So I love that.
Hold on one second.
So a lot of people are askingwell, what's the cost?
Right, but that's the wrongquestion.
It is what is lost by not doing.
It's not the cost, it's what islost.
And as I work with thesebusiness owners, I find the
difference between people thatare hyper, that are just super
successful, and those that arejust limp along are the
(19:08):
questions that they ask.
And the limp alongs are alwaysasking well, how much does it
cost?
No, what value does it bring?
Or what do I lose by not doingit?
I love that notion, so go ahead.
I interrupted you, but I justthink that's such an important
point to talk about.
It is.
Paul Hickey (19:22):
It is, and it's a major thesis.
Rick of the book and evenventure capitalists, who were
very smart people, are notanalyzing this the right way.
They're not looking at theopportunity costs, and I kind of
hammer away at that in the bookmultiple times.
But let me just give you anexample of one of the things you
give up by not being public,and one of the things you gain
(19:43):
if you do go public is a highervaluation.
It's called liquidity premium,and so the idea is, if you're an
investor and you have thechoice to invest in two
companies they're the same size,they're in the same industry,
everything's the same one'sprivate and one's public you
make an investment in theprivate company.
You may not be able to get anyliquidity or return on your
(20:05):
investment for five years or 10years, but you invest in the
public company.
You can invest today and sellyour stock tomorrow.
So you have that liquidity andpeople are willing to pay a
premium for liquidity.
So that's one of the reasons.
There's several other reasonswhy public companies have a
higher valuation than theirprivate counterparts, but on
(20:28):
average it's about 50 percenthigher, and so think about that
for a minute.
If you're a private companywith a valuation of 300 million
and you're going to raise, youknow, 50 million dollars, or
let's just call it 100 milliondollars dollars, or let's just
call it a hundred milliondollars.
(20:48):
Now you're diluting yourself.
Based on a $300 millionvaluation, versus, if you're a
public company, chances are yourvaluation is going to be 400 or
$500 million because of theliquidity premium.
So by staying private, you'reliterally it's costing you a
hundred to $200 million in valuein your company.
Rick Krebs (21:06):
Wow, what?
Yeah, I see that People.
It's counterintuitive, right.
They think the bigger you are,the less investors there are,
and that's the opposite.
So when you have a publiclytraded companies, there's a lot
bigger pool of investors andit's pushing that price up.
They think, no, I'm bigger, sothere'll be less money.
Not the case with Wall Streetthe bigger you are, the more
(21:29):
money there is.
Paul Hickey (21:30):
It's literally the opposite.
There's an inverse pyramid, Yep, exactly, and the smaller you
are, the less money there is foryou, and the bigger you are,
the more money there is for you.
Right, and that's the way itworks.
And you know, the small cappublic market is $4 trillion.
It has $4 trillion worth ofvalue and that's $4 trillion of
(21:53):
liquid money, and so it's not asmall market to be playing in,
so there's plenty of money forthese small cap companies.
So, you know, this is the wholeidea of when you do your
analysis.
As a private company, yes, it'sgoing to cost you $1 to $2
million to go public, and costyou $100 to $200 million to stay
(22:15):
private, Right?
So, wow, let's let's look atall those factors you know, and
there's a couple more that arekey ones to hit on, In fact.
So I have nine benefits thatyou get by being a public
company versus staying as aprivate company.
Those are benefits that arereally helpful in growing your
(22:38):
business, and each one of themare an opportunity cost if you
don't have them as a privatecompany, right.
So you know, we can talk aboutthose, but you know, I would say
, just before we jump into that,I would say for your listeners
out there how big do you need tobe before you start?
Considering that there's afamous venture capitalist in
(22:59):
Silicon Valley right now.
His name's Keith Raboy and heis a managing partner at the
Founders Fund.
That is Peter Thiel's fund.
It's one of the most successfulfund.
Peter Thiel is one of thesmartest guys on the planet.
He was the first institutionalinvestor in Facebook and he's
just extremely well.
And Keith is one of the guys outthere in the venture capital
(23:20):
community in Silicon Valleysaying you need to go public as
soon as possible, and he's notone of these VCs who think you
need to be a multi-billiondollar company before you go an
IPO.
He actually says if you've got$50 million in revenue, you
should start looking at doing anIPO, a small cap IPO, and the
reason he says that is he likesbecause you get more value.
He likes the transparency itrequires.
(23:42):
It requires responsibility.
You know responsibility andreporting and some structure and
discipline that you don't haveto have as a private company.
So, yeah, it's a little morework, but that's one of the
reasons you get a highervaluation and you get attract
more money and investors becauseof all those things, and so
he's helping the VC community.
(24:02):
Wake up to this, you know.
And again, hopefully my bookhelps to some extent.
Rick Krebs (24:06):
There you go, Move the needle right.
So you're saying probably 50million in sales.
When you're 50 million in sales, that's time to start looking
at an IPO and preparing for it.
Paul Hickey (24:15):
Yep, you can start.
And here's the other factor.
This is really important forsmall cap companies in terms of
determining whether you're acandidate to start really
considering, you need to havevery predictable growth for at
least two years from the timeyou do your IPO.
Small cap companies are allabout growth.
That's why the public investsin small cap companies.
(24:36):
It's because they have a lot ofgrowth potential.
Actually, I have a question foryou and your audience here to
answer.
Out of these companies, whichone of them was a small cap
company when they did their IPOApple, Microsoft, Amazon, Tesla
(24:57):
or PayPal?
Rick Krebs (24:59):
Wow.
Well, I'm going to say it's theone that I don't think it is,
and I want to say Amazon orMicrosoft it's a trick question.
Paul Hickey (25:08):
All of them were small cap companies when they
went public.
Rick Krebs (25:11):
No way.
Paul Hickey (25:12):
Really?
Yes, everybody's forgotten thatthey're the largest companies
in the world and they startedout as Amazon had a $400 million
market cap when they wentpublic.
Rick Krebs (25:25):
Wow, we'd only invested.
Paul Hickey (25:26):
Yeah right, microsoft had $700 million.
And so these companies were allsmall cap companies and again,
the VC community has forgottenabout that.
This is where great companiesare born is in the small cap
market.
You don't have to be amulti-billion dollar company to
do an IPO.
So, anyways, the venturecapital world, I hope, is waking
(25:48):
up.
But you need to have good growthas a small cap company.
So if your company is, ifyou're doing $100 million in
revenue and your revenue andsales are stalling, you're not a
good company to be a publiccompany.
You'll get crushed as a smallcap public company.
So really predictable.
And a lot of entrepreneurs saywell, what kind of growth rate?
(26:09):
Well, it depends on theindustry you're in in the
segment and it depends on thecomparables.
So you want to look at thepublic companies that are your
competitors and in your sectorand look at their growth rates.
And if you're at their growthrate or above, then you're
probably a good candidate forgoing public.
But you know general rule ofthumb you got to be growing 20,
30 plus percent a year at leastif you're going to get anybody's
(26:32):
attention as a small cap publiccompany.
So, at least 50 million inrevenue 100 million is probably
better, and you got to havereally feel very confident about
your growth for at least twoyears after you're public.
Now, once you get your 50, 100,$200 million in the IPO, you
can use that to really ramp upyour growth and even accelerate
it, which is one of the mainreasons you do it right.
Rick Krebs (26:57):
Interesting.
This is a world that I'm not in, but it's fascinating to me,
and so, as the listeners havequestions, how can they contact
you, paul?
How do they get answers totheir questions?
Paul Hickey (27:09):
Yeah, I have a website and, by the way, I want
to circle back to what I do now.
You introduced me, so I am notan investment banker any longer.
I don't actually raise themoney and do the IPOs.
I do what's called IPO prepwork.
So if you decide you want to gopublic, there's a lot you need
(27:30):
to do for a year to get ready,and one of the things I do is I
connect you with the bestinvestment bank depending on
your size industry there'sdifferent small cap investment
banks that I've worked with overthe years.
I'll connect you with the rightauditing firm based on your
size and your industry, theright law firm.
You got to make sure you getthe right lawyers and auditors
(27:50):
and professionals on board,helping put together an
independent board that you'regoing to need to have as a
public company, and so there's anumber of things that I do as
an advisor to help them do thisthe right way and to make sure
that it's successful.
And then, in addition to that,I work with a wealth management
company successful.
And then, in addition to that,I work with a wealth management
(28:11):
company Legacy Wealth Managementand so, obviously, once you do
the IPO, most entrepreneurs arenow sitting on $100, $200, $300,
$500 million worth of liquidstock.
This is another benefit forgoing public is you get what I
call a flexible exit.
So if you're building yourbusiness and you sell it, you're
(28:33):
done.
You might have an earn out, butit's pretty much done and as
that business grows you're notgoing to participate, typically
in the future growth.
When you do an IPO, you can sella little at the IPO.
You want to take some money offthe table and sell five or 10%
of your position.
Let's say your position isworth $200 million.
(28:53):
Now, after you go public, it'snot unusual to take $20 million
off the table and diversify.
Wall Street understands theimportance of that.
And then maybe this thing goesand doubles over the next two or
three years and now it's worth$400 million.
It's okay to take another 10%or whatever your needs are to
diversify.
So you have the options.
(29:14):
You could actually set up aselling plan to sell like 1% of
your stock every month as a wayto diversify and to take some
money off the table.
So there's lots of flexibilityin exiting.
You can have a big chunk.
You sell at IPO.
You can sell nothing.
You have ultimate flexibility,which is another real key
(29:34):
benefit, not only for thefounders but also for the
investors, the venturecapitalists, because they can
get liquidity, which they want,or they can hang on if they
really think this is the nextAmazon, they can hang on to
their investment and maybe 10exit again, but have the option
to sell anytime they want.
Right, and so that's that's.
Another big benefit is justliquidity that you get.
(29:57):
Everybody benefits fromliquidity and I'll tell you one
of the other benefits, rick,here is as a public company
versus private, and this is ahard one to put a number on.
You know valuation premium, wecan put a number on that.
But recruiting talent if you'rea growing company, probably the
most important thing you do asan owner, founder, slash, ceo is
(30:18):
recruit the best talent you canget your hands on, because
companies are just people andespecially if you're growing
really fast, you need the bestpeople you can get your hands on
.
Now, if you have two companiesthat are trying to recruit the
same person and one of them isoffering stock options in a
private company that sometime inthe future and years may be
worth something, or you're apublic company that has liquid
(30:41):
stock that is able to be soldliterally as soon as they earn
it.
Who's going to win in thatcontest?
For that person, it's thepublic company.
Public company stock optionsare really valued by you know,
high level, talented people andyou know obviously, if you go
(31:01):
and get some stock options at aprivate company and they go
public, it can be worth a lotand you can do really well and a
lot of people have.
But if you're competing fortalent and you're a public
company and have that option tooffer stock options that are
with a public company and haveliquidity versus a private
company, you win as a publiccompany assuming all things also
are equal, right.
So it's another big benefit andanother huge cost.
(31:24):
As a private company, you'relosing people that you don't
even know.
You're losing because they'renot even coming to you, right?
Announcer (31:30):
They're going to the public companies first.
Paul Hickey (31:32):
Right.
So another big reason to gopublic.
Rick Krebs (31:36):
Yeah, interesting.
Well, this has been reallygreat today.
Paul, thank you for sharing,and I'm going to tell the
listeners about the book.
Where can they find you and howdo they get in touch with you?
Questions, yeah.
Paul Hickey (31:49):
So they can go to my website, which is six
summitsco, ceo, and it's spelledout S I X, s, u, m, m I T S six
summitsco.
That's my IPO prep and on therethere's a place to reach out
and get ahold of me on thewebsite and they can email me
and then I'll be happy to talkto them about the possibilities
(32:12):
of them doing a small cap IPO.
Rick Krebs (32:15):
All right, well, sounds good.
There you have it.
Thank you to the listeners andeveryone.
Have a great day.
Thanks for having me on Rick.
Announcer (32:24):
Thank you for attending our podcast.
We invite you to join us forfuture episodes of M&A, murders
and Accusations, the good, thebad and the ugly of selling your
business.
You can also visit us atwwwbsalesgroupcom or email Rick
directly at rick atbsalesgroupcom.
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