What Every Entrepreneur Needs to Know About IPOs with guest Paul Hickey

So , before we get started , what I'd like to do is I'd like to hear a little bit about you , a little bit about your background , and I want to hear about your background literally . We're looking at an island here , so tell me about that first , paul . What is that island ?

I was taking small cap Chinese companies public in the US and I was traveling and spending a lot of time there and I thought , well , it'd be nice to get a little private island , put a couple of villas and then send my Chinese clients there as a perk of doing business with us . So that's what I did .

I acquired this property and then we ended up not developing it . I stopped doing business in China and so right now we're looking for developers that want to do nice little green boutique resorts to partner with , if anybody out there is interested . It's an unbelievable piece of property .

It's a reef all the way around it , it's untouched virgin white sand , it's outside of the tsunami belt and typhoon belt , so it's really uniquely positioned and just stunning . I just don't do business over in that part of the world anymore , so we're trying to find some people that want to go out and do something interesting on the island .

So Paul does IPOs , so small cap IPOs and I'm not in that space very much , but we have clients once in a while that want to take their business and grow it and make it public , and so Paul does that , and so that's why I've invited him on the show today . So how did you get started with what you do , paul ?

Prepaid calling cards and prepaid wireless and mobile is still pretty dominant in most of the world , especially the developing world .

But so we built this little machine that looked like a credit card terminal and you put it into 7-Elevens and somebody would walk in and ask for a prepaid calling card and our machine would print one out on demand and it did really well . We ended up placing that in thousands of retail stores around the country and grew like crazy and did our own IPO .

I took the company from all the way , from startup as a CEO and controlling shareholder all the way through an IPO , ringing the opening bell at the American Stock Exchange .

That was an experience and a highlight , and while I was doing the IPO , I was sitting back watching how much the investment bankers were making and how much harder I was working and I thought I think I need to do that someday .

And so , after we did our IPO , we actually got acquired by a much , much larger company and taken private a couple of years later by a Mexican telecom company that wanted our technology for Latin America .

We had started to license the technology all over the world to Canada and Australia and France and all over the place and so they saw that it was a good opportunity for Latin America .

So , anyway , after that , I actually got hired to be the CEO of a Chinese company and moved to Shanghai , was planning to stay there for three years , but this leads into what I'm doing now .

I ended up only staying a year and I left and co-founded an investment bank with a partner of mine , greg Fryhoffner , who at the time was living and working in New York and he'd come out of MBA school , went right to work on Wall Street and had been there 20 years .

And so , greg , when I was in China , I was calling Greg , saying , greg , are you seeing these small cap Chinese companies going public in the US ? They're really high quality deals , and I think I know more about investment banking than a lot of the guys doing these deals over here .

So we started this boutique firm focused on small cap , and when I say small cap I'm talking about companies that have a value of about 100 million to a billion dollars in that range . That was our focus .

Large caps are 10 billion to basically 100 billion and mega caps are 100 billion or above , essentially somewhere in that range . And so that's how I got into the business is taking my own company public and then starting this investment bank , and then we sold the investment bank in 2015 . And since then I've helped set up a couple of hedge funds .

I've done some advisory work . I got involved in raising money for a semiconductor Bitcoin , asic mining chip and semiconductor software technology low power solution company called Granite Mountain Technology brilliant company .

And then recently what I did is I helped raise and advise an AI startup company in Salt Lake City that needed to raise a couple million dollars , so I helped them as an advisor in that project . And while I was talking , this kind of leads to the book in our topic . By the way , sorry , I'm just going to keep rolling .

No , this is very interesting , keep going . And so what happened is I was talking to the venture capitalists that were interested in investing in this AI startup company .

And venture capital funds have different themes and mandates . So some venture capital funds are raising money and telling their investors we're only going to invest in software companies .

And other venture capital funds may raise money and say we're only investing in organic food companies and the food chain supply technology companies , and so they can be all different themes and so these venture capital companies also are different sizes .

So some may only invest a half a million to a million dollars in early stage companies , like they call them , seed rounds , and then the pre-seed round is friends and family 100,000 , 50,000 , couple hundred thousand , right . And then the A round venture capital . There are funds that do A rounds , which is they'll invest .

You know , five to 10 or 20 million is an A round , and then a B round is like 10 to 50 million , and then a C round is 50 , 10 to 50 million , and then a C round is 50 million to a couple of hundred million , and and there are different funds , focus on different rounds of funding , you know , and different places where the companies are at as they're

growing . So so that's the venture capital world and you know , rick I'm glad you brought that up A lot of entrepreneurs out there listening who are , you know , growing their business , maybe thinking of selling it . I am surprised at how many of them are afraid of venture capitalists and raising money from venture capitalists . Of people .

A lot of companies have come to us to go public because they didn't . They want to raise money that way , because they didn't want to raise it from venture capitalists . And I got to tell you a lot of those fears are unfounded .

I think that venture capitalists are vulture capitalists , so they just want to invest and then ultimately take over the company and take control . That is the last thing venture capitalists want . I'll tell you , the dream investment of your typical venture capitalist is to write a check and then not even hear from you for five years until you sell the company .

That's what they all want . They just want you to take the money , build it , sell it for a lot of money and make them a lot of money on their investment . They don't want to be in there running your company and interfering and having to do work . That's not what they want to do Now .

They all didn't do that when they invest in a company that's not working out , because they're trying to save their investment right . And so the thing I would say to your group of entrepreneurs listening to this is be a little more open-minded and at least try and get in front of some venture capitalists and see what that experience is like .

I think you're going to find that they're way more supportive than you think and that maybe it what's in your mind and you know , are they easy to work with ? Yeah , if you know what they want . If you're brand new to working with venture capitalists , it's going to seem like a lot of work , but that's part of kind of growing up .

Like a lot of work , but that's that's part of kind of growing up . You know , as an entrepreneur is . If you can , if you can raise a round of money from from a venture capitalist , then you're you're on the right path of doing big things , I think .

Pre-seed seed A , b , c , so there's a lot of different levels at which they can invest Right . And , yeah , that's interesting because there is kind of a bad , bad connotation .

I think there's a few bad ones out there that have given them a bad reputation , unfortunately , but they're necessary and they're and they're helpful to these business owners that are looking to take their , their companies , public . Yeah , that's very interesting .

A couple of years ago , I was talking to venture capitalists and I was saying how many portfolio companies those are the companies they've invested in are getting ready for an IPO .

And then I would say , well , do you have any companies doing 50 or a hundred million dollars in revenue ? And they said yes . And I said , oh well , you know , they're big , they're . They're big enough for a small cap IPO .

They could probably get a valuation of you know , 200 , 300 , 400 , $500 million and probably raise 50 or a hundred million dollars and and become public . And the response I got from every single one of them was really surprising . It was almost like I started speaking Chinese to them . They're like a small IPO .

I I didn't know you could go public that soon , and isn't it too expensive ? And that was their common also response it's too expensive to be public as a $200 or $300 million company . And then what I would do , rick , is I'd say do you know how expensive it is to stay private ? Do you know what the opportunity cost is ? And that's what got their attention .

They're like what do you mean ? And so this is why I wrote the book and I titled it IPO versus VC . I'm speaking to the entrepreneurs out there who also think it's too expensive to go public when you're a $500 , $200 million company , and I'm speaking to the VCs to go hey guys , there's another option here .

There's another option here because a lot of VCs complain about liquidity , meaning they've invested in a company and they're waiting for them to either go public or to be acquired so that they can get a return on their investment . Right , and it's called a liquidity event .

And a lot of venture capitalists have to wait generally at least five years , but a lot of times it's 10 years or longer and they're waiting too long . They could get liquidity if they get these companies out the door in a small cap market . So anyway , that's .

That's the reason I wrote this book , which , by the way , hit number one bestseller on Amazon in two different categories venture capital and public finance .

But the reason is around 2011 , there was about $20 billion of venture capital money invested every year by 2021 , that was over $200 billion 10x the amount of venture capital money to invest in these companies 10x in literally 10 years .

And so when you have that much money , you can't deploy it as a venture capital company or firm by writing $500,000 checks and million dollar checks . You got to start writing bigger checks , and that never existed back in 2005 .

You weren't getting venture capitalists writing 50 and $ million dollar checks , but now you 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 50 million bucks , well , you could do that in a small cap IPO . It's going to take you about a ? year .

It's a lot of work , but if you want to raise it from venture capitalists and you've already raised an A B round and so you've got all your documents and everything , you might be able to do that in three or four months if you've got interested investors raising it from venture capital an IPO . So that's why a lot of companies are .

That's why IPOs , small cap IPOs kind of fell out of favor . One of the main reasons is because it was just easier to raise 50 or a hundred million bucks from venture capitalists when that didn't exist in the 2000s . Right , it was very rare . So , yeah , that's one of the reasons . And you know SOX , which is ArbanOxley Act .

This was an act passed by Congress to require more reporting to public companies so there was less chance of fraud . That increased the cost of going public and remaining public , so that kind of had a little dampening effect also .

Now that sounds like a lot to a small company that's maybe doing 50 or 100 million dollars in revenue , but when you think about the fact that you're going to be able to raise 50 million dollars at a good valuation and use that money to grow , because once you're public as a small cap company , it's also going to cost about one to $2 million in legal fees

and filing fees and you're being on listing on NASDAQ and your DNO , insurance and your board and your investor relations . You know those are all new expenses and if you manage them really well , you can probably do it for about a million dollars a year and so .

But it can cost you more depending on how big your company is and what you want to do in terms of all the things that require expenses . But what most people don't understand and this is the big message to the founders and VCs is how expensive it is not to be public .

And as I work with these business owners , I find the difference between people that are hyper , that are just super successful , and those that are just limp along are the questions that they ask . And the limp alongs are always asking well , how much does it cost ? No , what value does it bring ? Or what do I lose by not doing it ?

I love that notion , so go ahead . I interrupted you , but I just think that's such an important point to talk about . It is .

But let me just give you an example of one of the things you give up by not being public , and one of the things you gain if you do go public is a higher valuation .

It's called liquidity premium , and so the idea is , if you're an investor and you have the choice to invest in two companies they're the same size , they're in the same industry , everything's the same one's private and one's public you make an investment in the private company .

You may not be able to get any liquidity or return on your investment for five years or 10 years , but you invest in the public company . You can invest today and sell your stock tomorrow . So you have that liquidity and people are willing to pay a premium for liquidity . So that's one of the reasons .

There's several other reasons why public companies have a higher valuation than their private counterparts , but on average it's about 50 percent higher , and so think about that for a minute .

If you're a private company with a valuation of 300 million and you're going to raise , you know , 50 million dollars , or let's just call it 100 million dollars dollars , or let's just call it a hundred million dollars . Now you're diluting yourself .

Based on a $300 million valuation , versus , if you're a public company , chances are your valuation is going to be 400 or $500 million because of the liquidity premium . So by staying private , you're literally it's costing you a hundred to $200 million in value in your company .

Not the case with Wall Street the bigger you are , the more money there is .

It has $4 trillion worth of value and that's $4 trillion of liquid money , and so it's not a small market to be playing in , so there's plenty of money for these small cap companies . So , you know , this is the whole idea of when you do your analysis .

As a private company , yes , it's going to cost you $1 to $2 million to go public , and cost you $100 to $200 million to stay private , Right ? So , wow , let's let's look at all those factors you know , and there's a couple more that are key ones to hit on , In fact .

So I have nine benefits that you get by being a public company versus staying as a private company . Those are benefits that are really helpful in growing your business , and each one of them are an opportunity cost if you don't have them as a private company , right .

So you know , we can talk about those , 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 to be before you start ? Considering that there's a famous venture capitalist in Silicon Valley right now . His name's Keith Raboy and he is a managing partner at the Founders Fund .

That is Peter Thiel's fund . It's one of the most successful fund . Peter Thiel is one of the smartest guys on the planet . He was the first institutional investor in Facebook and he's just extremely well .

And Keith is one of the guys out there in the venture capital community in Silicon Valley saying you need to go public as soon as possible , and he's not one of these VCs who think you need to be a multi-billion dollar company before you go an IPO .

He actually says if you've got $50 million in revenue , you should start looking at doing an IPO , a small cap IPO , and the reason he says that is he likes because you get more value . He likes the transparency it requires . It requires responsibility .

You know responsibility and reporting and some structure and discipline that you don't have to have as a private company . So , yeah , it's a little more work , but that's one of the reasons you get a higher valuation and you get attract more money and investors because of all those things , and so he's helping the VC community . Wake up to this , you know .

And again , hopefully my book helps to some extent .

That's why the public invests in small cap companies . It's because they have a lot of growth potential . Actually , I have a question for you and your audience here to answer . Out of these companies , which one of them was a small cap company when they did their IPO Apple , Microsoft , Amazon , Tesla or PayPal ?

But you need to have good growth as a small cap company . So if your company is , if you're doing $100 million in revenue and your revenue and sales are stalling , you're not a good company to be a public company . You'll get crushed as a small cap public company . So really predictable . And a lot of entrepreneurs say well , what kind of growth rate ?

Well , it depends on the industry you're in in the segment and it depends on the comparables . So you want to look at the public companies that are your competitors and in your sector and look at their growth rates . And if you're at their growth rate or above , then you're probably a good candidate for going public .

But you know general rule of thumb you got to be growing 20 , 30 plus percent a year at least if you're going to get anybody's attention as a small cap public company . So , at least 50 million in revenue 100 million is probably better , and you got to have really feel very confident about your growth for at least two years after you're public .

Now , once you get your 50 , 100 , $200 million in the IPO , you can use that to really ramp up your growth and even accelerate it , which is one of the main reasons you do it right .

So if you decide you want to go public , there's a lot you need to do for a year to get ready , and one of the things I do is I connect you with the best investment bank depending on your size industry there's different small cap investment banks that I've worked with over the years .

I'll connect you with the right auditing firm based on your size and your industry , the right law firm .

You got to make sure you get the right lawyers and auditors and professionals on board , helping put together an independent board that you're going to need to have as a public company , and so there's a number of things that I do as an advisor to help them do this the 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 company Legacy Wealth Management and so , obviously , once you do the IPO , most entrepreneurs are now sitting on $100 , $200 , $300 , $500 million worth of liquid stock .

This is another benefit for going public is you get what I call a flexible exit . So if you're building your business and you sell it , you're done . You might have an earn out , but it's pretty much done and as that business grows you're not going to participate , typically in the future growth . When you do an IPO , you can sell a little at the IPO .

You want to take some money off the table and sell five or 10% of your position . Let's say your position is worth $200 million . Now , after you go public , it's not unusual to take $20 million off the table and diversify . Wall Street understands the importance of that .

And then maybe this thing goes and 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 . You could actually set up a selling plan to sell like 1% of your stock every month as a way to diversify and to take some money off the table .

So there's lots of flexibility in exiting . You can have a big chunk . You sell at IPO . You can sell nothing .

You have ultimate flexibility , which is another real key benefit , not only for the founders but also for the investors , the venture capitalists , because they can get liquidity , which they want , or they can hang on if they really think this is the next Amazon , they can hang on to their investment and maybe 10 exit again , but have the option to sell anytime they

want . Right , and so that's that's . Another big benefit is just liquidity that you get . Everybody benefits from liquidity and I'll tell you one of the other benefits , rick , here is as a public company versus private , and this is a hard one to put a number on . You know valuation premium , we can put a number on that .

But recruiting talent if you're a growing company , probably the most important thing you do as an owner , founder , slash , ceo is recruit the best talent you can get your hands on , because companies are just people and especially if you're growing really fast , you need the best people you can get your hands on .

Now , if you have two companies that are trying to recruit the same person and one of them is offering stock options in a private company that sometime in the future and years may be worth something , or you're a public company that has liquid stock that is able to be sold literally as soon as they earn it . Who's going to win in that contest ?

For that person , it's the public company . Public company stock options are really valued by you know , high level , talented people and you know obviously , if you go and get some stock options at a private company and they go public , it can be worth a lot and you can do really well and a lot of people have .

But if you're competing for talent and you're a public company and have that option to offer stock options that are with a public company and have liquidity versus a private company , you win as a public company assuming all things also are equal , right . So it's another big benefit and another huge cost .

As a private company , you're losing people that you don't even know . You're losing because they're not even coming to you , right ?