Hedge funds (via PIPEs or private investment in public equities) and venture capital both can play a significant role in helping medium-sized businesses access the cash they need to impact the business. Below is a fully copyrighted excerpt – a case study / example of the PIPE and venture capital combination – from my new book, The Funding Is Out There! (Note: the case studies are all 100% real. Some of the identifying characteristics, including names and location, have been changed to protect the business’ and owners’ privacy.)
Example Twenty: Medium Business Financing – Venture capital and PIPE/Hedge fund financing
Gill Hurt founded Pharmed, a pharmaceutical-coated device manufacturer, ten years before in Radnor, Pennsylvania. Recently, Gill had won a few large contracts with distributors and medical device manufacturers in the United States and Europe. He needed cash to expand Pharmed’s facilities in Radnor, hire sales staff, and add operational support to fill the orders. Gill had previously raised $3.5 million from venture capitalists who, when approached for more money, were now reluctant to provide follow-on funding.
One of the venture capitalists who sat on the board recommended that Gill pursue a PIPE. The investor connected him with an investment banking advisor that specialized in PIPEs. Gill liked the prospect of an IPO at an earlier stage because it would result in less dilution and provide direct access to the capital markets. Gill decided to pursue a PIPE. The advisor located a public shell company that had been defunct for the last five years. Pharmed merged into this shell, then listed on the OTC BB under a new ticker, PHMD.OB. Subsequently, Gill’s advisor pursued hedge funds.
The investment bank matched Pharmed with over 30 hedge funds. With his investment banker guiding and advising him, Gill made most of the presentations to the hedge fund managers. Two separate fund managers, one in the United Kingdom and one in the United States, joined forces and led the negotiation of terms. Six other hedge funds and seven other accredited investors rounded out the group that provided the $10.5 million in financing to Pharmed seven months after its OTC listing.
The accounting, legal, and other fees for the reverse merger and PIPE transaction plus the investment banking fees totaled $1.4 million. The $1.4 million in fees came out of the $10.5 million financing raised. Pharmed also spends over $30,000 annually to comply with Sarbanes- Oxley and SEC reporting requirements. However, Gill believes it was well worth it. Pharmed‘s performance exceeded expectations and now lists on Nasdaq. Gill anticipates Pharmed will need additional expansion capital in a year. He will use the same investment bank to make a secondary offering using traditional methods.
“Excerpted from The Funding Is Out There! Access the Cash You Need to Impact Your Business ©2014 Tiffany C. Wright. Used with permission of Morgan James Publishing. All rights reserved. Available in October 2014. Get your advance copy at http://theresourcefulceo/campaign.”