A Nasdaq-Listed CEO’s Reflection: Why We Avoided VC Funding & Decided to Direct List Instead

Written By Doug Croxall

Just over a 12 months in the past, Crown Electrokinetics uplisted to the Nasdaq. Our ticker: CRKN.

It was a giant second within the lifetime of our firm. But our direct itemizing was actually just the start of a tremendous year of progress, as we continued to speed up the commercialization of smart-window applied sciences that may save our clients money on their vitality payments and cut back carbon emissions on the similar time.

I’ve fielded tons of of questions from clients, new hires and traders since our direct itemizing. And in these discussions, after we discuss the best way our expertise works and the way we’re bringing clients via the door, probably the most frequent questions I’m requested is: “Why did Crown go public so early?”

The reply to that query is critically necessary, not simply to me, however entrepreneurs in all places – whether or not they understand it or not.

First, entrepreneurs and their traders ought to know that Crown’s journey to the second-largest stock exchange in the world by way of direct itemizing isn’t that unusual.

It’s what I did with my final firm, Marathon Patent Group, now known as Marathon Digital Holdings (Nasdaq: MARA), which began within the mental property sector and is now a frontrunner within the cryptocurrency market. And many different companies have chosen the direct-listing path as an alternative of IPOs or SPACs, together with: Coinbase, Amplitude, Roblox, Slack, ZipRecruiter, Warby Parker and Squarespace.

For Crown, we took step one of direct listing on the OTCQB Venture Market in June 2020. Then, seven months later, our stock was authorised for buying and selling on the a lot bigger Nasdaq Capital Market in a course of known as “uplisting.” In conjunction with that uplisting, we additionally completed a $21.5 million public providing.

So what have we realized from direct itemizing and why ought to it matter to you as an entrepreneur or investor?

1. You preserve extra of the equity. Relying on enterprise capital for years, hoping for a blockbuster IPO or SPAC on the finish of the rainbow, can lead to huge dilution for firm founders and early traders. Sometimes, the dilution after a number of VC funding rounds is so excessive, the founders of a startup lose management of their firm. Going public by way of a direct itemizing retains founders and early traders within the driver’s seat.

2. You can entry a wider investor base, sooner. In addition to dropping management of your organization, handcuffing your self to a handful of VC funds or excessive web price people limits your potential to develop. You are successfully betting that their judgment is infallible, from what the corporate is price, to which markets you need to be in, to what senior workers you need to be bringing on. Why should not retail traders be given the identical entry as enterprise funds and excessive web price people? Make fundraising extra open and democratic; let smaller traders develop with the corporate. This already occurs on Kickstarter, with a fraction of the oversight and transparency of a publicly traded firm, so do not inform me it is too dangerous for retail traders.

3. Your govt staff is healthier aligned with shareholders. The dilution that comes with a number of rounds of VC funding additionally means much less equity for the administration staff and workers. Does splitting 10-20% of equity between dozens and dozens of executives and senior workers – which is fairly typical for a VC-backed tech agency – present these people with a lot incentive past their paychecks? Not actually, no. When the individuals making day-to-day operational choices have a much bigger possession stake in an organization, they’re extremely motivated to ship stellar outcomes, which rewards all shareholders. As Charlie Munger said: “Show me the motivation and I’ll present you the end result.”

For our firm, direct itemizing offered the monetary assets and investor confidence we wanted to speed up the commercialization of electrokinetic expertise, establish clients who need to purchase this expertise, and begin taking orders for our first product: the Smart Window Insert.

We tripled the dimensions of our staff with extremely certified, deeply skilled professionals in engineering, advertising and manufacturing, and as I write this in early February 2022, our first devoted manufacturing facility is about to come on-line in Oregon – not removed from the labs the place electrokinetic movie was developed, initially by Hewlett Packard after which by Crown’s analysis staff, which incorporates quite a few former HP engineers.

Now, earlier than you race to file your S-1, please know that there are vital hurdles to going public by way of direct itemizing – a few of which we’ll summarize subsequent. But this isn’t meant to discourage you, simply put together you. And keep in mind: Any govt staff that wishes to entry public markets, by way of direct itemizing or not, can have to cross these assessments at some stage:

1. It’s laborious and troublesome. The regulatory necessities for a publicly traded firm far exceed something that applies to privately held companies – and rightly so. Plan for 6-12 months of intense work coping with FINRA’s Public Offering System, the submitting necessities of the SEC and any questions that monetary regulators have about your paperwork. This work will in fact culminate in an S-1 registration assertion, dozens and even tons of of pages lengthy, however there’s much more to the method than only one huge submitting shortly earlier than your itemizing.

2. It’s expensive. Understanding and demonstrating compliance with U.S. securities legislation is tough, even for essentially the most skilled company govt. You can’t do it alone and which means hiring attorneys (ideally, the nice sort). So whereas each firm is exclusive, don’t be stunned in case you rack up authorized bills within the neighborhood of $500,000 to $1.5 million whereas pursuing a direct itemizing.

3. It comes with appreciable, indefinite scrutiny. This is probably the most important adjustment you will want to make. Becoming a publicly traded firm calls for a complete new degree of transparency and accountability. Background checks. Public disclosure of monetary efficiency. Timely reviews on occasions which have a fabric influence, good or unhealthy, on your corporation. Extreme warning round firm info and rather more. I’ve discovered that this exterior scrutiny, nonetheless uncomfortable, finally drives higher outcomes for your corporation, your clients and your shareholders. But it ought to issue into the way you construct your core staff. More skilled founders, particularly people who have helped run public corporations, have an enormous benefit over those that haven’t. 

In conclusion: As you construct and develop a startup, there are many methods to increase capital, and I’m not suggesting {that a} direct itemizing can or must be the one means. If you might be extra snug with VC funding and ultimately an IPO or SPAC, by all means, keep on that highway.

But I consider too many startups simply assume the VC highway is the one one out there and commit themselves to it with out understanding the professionals and cons and with out totally assessing the alternate options.

 As Jay Heller, VP and Head of Capital Markets for Nasdaq, says: “Everything we offer clients in an IPO, we offer in a direct listing.”

Speaking for myself and my management staff at Crown, I consider that direct itemizing is a extra environment friendly, investor-friendly and results-driven means to increase capital as a startup. More early-stage corporations ought to strongly think about it. 

Originally published on Crownek.com.

The views and opinions expressed herein are the views and opinions of the writer and don’t essentially replicate these of Nasdaq, Inc.