In general, it can be stated that there is no uniformly applicable definition of the term “nanocap”. For this reason, it is important how Scalania classifies companies in terms of size. Nanocaps..

• have a pre-IPO (pre-money valuation) of less than 25 million euros,
• and whose issue amount for the IPO is less than 5 million euros.

Especially companies in such a growth stage have already exhausted first financing options and are now dependent on external capital. It is precisely at this point that an IPO can make sense for nanocaps.

An Initial Public Offering (IPO) describes the process of the initial offering of shares to the public. Shares then can be traded publicly and the company generates capital in return. The number of shares issued during the IPO is determined by the company itself, depending on how much capital is required. Following the IPO, there is also the option of issuing further shares if new capital is required, thus ensuring long-term financing options for the company.

Basically, the company should meet the criteria of a nanocap, as defined by Scalania. In addition, the type of company, the industry and the development phase are decisive for a successful IPO. The following criteria play a role in determining whether an IPO is suitable:

• Potential for strong growth with low risk
• A commercial breakthrough has already been achieved
• The company’s management is reliable and has sufficient competence
• The company has an USP that is difficult to imitate and is legally protected
• The required capital is between 500,000 and 5 million Euros and is needed in a period between 6-12 months.
  
  

If you want to know whether your company is eligible for an IPO, use our questionnaire here and get non-binding feedback!

Advantages of an IPO are:

+ Reaching a broad audience of investors

+ Maintain control over the compay

+ Increase valuation

+ Improve the company image

+ Define a valuation fix point

Disadvantages of an IPO are:

– Attention and transparency on company activities

– Additional work in form of PR, Reporting etc.

In order to gain maximum value out of going public, the IPO should be sufficiently planned in advance. Between the first contact and the decision whether your company is eligible for an IPO, it only takes about 4 weeks. Once the decision has been made, a roll-out of the project plan up to the IPO takes place. This period usually covers 6 to 12 month. The capital requirement should therefore be planned accordingly. If capital is needed in advance, there are various options for bridge financing or a pre-IPO to cover short-term requirements.

The path up to an IPO comprises many individual steps that ensure its success:

1. Examination of the company, the product and the relevant market environment
2. Dry run with experienced nanocap investors
3. Detailed due diligence process (management, financial, legal, commercial)
4. Roll-out of the project plan
5. Development of an investment story, choice of marketplace and if needed bridge financing
6. Preparation of the IPO including market analysis in GER/SE/DK, IPO marketing
7. IPO
   
   

The purpose of this process steps is not merely to raise new capital in the short-term, but rather to build a long-term financing strategy.

If the planned period until IPO is too long and capital is needed earlier, there is the option of bridge financing. This financing instrument makes it possible to cover capital requirements in the short term until the IPO has been completed. Bridge financing can take place in various forms:

• A bank provides the company with the required sum in the form of a loan, which is repaid after the IPO has taken place.
• Investors cover the open capital requirement and are paid via shares in the company instead of repayment. Thus, the bridge financing takes the form of a convertible loan.
• Raising venture debt, which partly contains an equity component in the form of warrants and guarantees the venture debt provider shares if certain success parameters are met.
  
  

Another option for bridging the period until the IPO is a pre-IPO. This describes a situation in which a private company sells shares before the listing and can thus close financing gaps for further development.

Contrary to prevailing opinions, the IPO is only one embedded element of a long-term financing strategy and can be combined with other capitalization instruments. The IPO and thus the step towards a publicly traded company opens the door for further attractive financing opportunities. The public attention, broad audience of investors and increased company value that come with an IPO subsequently provide access to a wide range of financing instruments. In addition to the uncomplicated possibility of further capital increases through the issue of new shares or fundraising activities, the company also has numerous exit options at its disposal.

In general, the requirements for an IPO are based on the regulations of the trading venue. Usually, companies place 10-25% of their shares in free float with the aim of covering their capital requirements for the following 12 months. Once the IPO has taken place, additional shares can be generated in return for new capital as a result of a capital increase. The dilution that comes with an IPO then depends on the company´s performance and can be offset by a warrant program if necessary.

In the course of an IPO, certain requirements must be met in order to comply with the legal requirements. These consist of:

• Legal form – The prerequisite for an IPO is the legal organization structure of a German stock corporation (AG)

• Accounting form – Balance sheet accounting in accordance with the K3 or IFRS standards

• Requirements for the composition of the supervisory board – At least four persons and at least one of these persons must be independent of the company, the company management and the company´s major owners; A majority of the directors shall be independent in relation to the company and the company management.

After a successful listing, many different opportunities are available as a listed company for future operations. However, legal regulations must also be observed in accordance with the law. These vary according to the country and marketplace on which the company is listed.

In general, however, the following components are the basic requirements:

• Quarterly/ or semi-annual publication of a financial statement (unaudited)
• Annual publication of an annual report
• Annual general meeting
• Report of the annual general meeting

IPOs for nanocaps represent a sensible financing instrument depending on the maturity status. An IPO makes sense above all when a company is already beyond seed maturity status. The validation of the business idea has already been completed and prototypes exist in the form of a minimum viable product. Specifically, this means that the commercial breakthrough has already been achieved, but the financial breakthrough is still to come.

Financing options in the form of family and friends, support from incubators as well as public institutions should have already been exhausted. Furthermore, the IPO volume should be at least 500k €. In general: The more mature the company, the larger the IPO volume to be realized.

Furthermore, it should be noted that the IPO is only one of many different financing options and should therefore rather be seen as a starting signal for the further development of growth companies and not as a final option.

While in Germany financing options in the form of venture capital or business angels are primarily used for growth companies, Scalania is the first German company to offer the opportunity of an IPO based on the Swedish growth company stock market as a further financing option. In this regard, Scalania assists the company as its project manager. 

This innovative way of raising capital allows nanocaps, among other things, to access professional investors, retain control of the company and increase value through ongoing development if the company.

Scalania supports growth companies in their long-term corporate development through a unique network in the Nordic region and the experience of more than 150 completed IPOs.

A warrant is the right – but not the obligation – to acquire a certain underlying asset in a predefined period of time at a predetermined price and thus follows the basic functionality of an option. For the holder of this warrant option, this gives two possibilities: make use of the right and buy (call) or sell (put) the option. In contrast to a stock option, a warrant option grants the right to purchase an underlying security from an issuer and not from another investor.

The advantage of a warrant program from the issuing company’s point of view is to counteract the dilution associated with an IPO and to regain autonomy in the company. Furthermore, a warrant program is not only a financing instrument for future projects, but also offers the possibility to acquire warrant options on the company in the sense of an employee participation program. This can be done either through the sale of warrant options or through a plan where employees receive warrant options based on their job performance or length of service for the company. This can subsequently act as an incentive for higher work performance among employees in order to generate profits through increased enterprise value.

Compared to alternative financing options, an IPO offers the opportunity to raise capital without a major loss of control and thus retain control over the strategic direction of the company.

Although the IPO ensures that shares in the company are lost to new holders in return for capital, only a small percentage is given into free float, especially in the course of the warrant option.

In general, all three alternatives represent a financing instrument for growth companies and subsequently support companies in their development. Nevertheless, there are some significant differences:

• While both VCs and Family Offives become shareholders in the company over a pre-defined period of time and thus have an influence in the strategic direction, in case of an IPO the company shares are divided among a significantly larger number of shareholders, thus fully retaining control by the current owners or founders
• As an element of a financing strategy, an IPO continues to provide access and excellent combination possibilites with various capitalization instruments
• VCs and Family Offives usually excel not only in financial but also strategic support and bring competencies to the company
• The execution of an IPO is detached from strategic decisions, so that shareholders do not profit from a possible exit

Once the initial financing options in the form of bootstrapping, a pre-seed investment and, if applicable, a seed investment have been exhausted, an IPO offers nanocap companies an excellent opportunity to raise new capital. What is particularly attractive about an IPO is the possibility of continuing to have a wide range of financing options available afterwards. These are e.g.:

• Private placements
• Share issues
• Debt capital
• Mezzanine capital
• Venture capital
• Senior debt
• Loan
  
  

An IPO is the starting point for further financing rounds and thus the basis for long-term growth of nanocap companies.