Reading: Alternative Going Public Strategies

The preceding considerations show that, as with all other financing options, there is no one-size-fits all solution. For some companies, the benefits of a DPO will outweigh its cost, whereas the opposite will be true for other companies.

Generally speaking, a DPO will tend to be more appealing to firms with a strong follower base (strong brand name, loyal customers, etc.) as well as firms that pursue environmental, social, or governance goals that go beyond pure financial returns (impact investing). With the advancement of technology, it also seems conceivable that DPOs will become an increasingly popular source of financing for new ventures.

Strong follower base

A strong follower base obviously facilitates the marketing and placement of the securities, as the company is already well known and well received by the public. A case in point was the DPO of Vermont-based ice cream maker Ben & Jerry's back in 1984. They placed ads in the local newspaper and invited the public to buy shares. The minimum lot size was only $126 (12 shares at $10.5 each) so that a very large part of their loyal customer base could actually afford to buy shares. Presumably, to many of these "investors," buying shares was less of a strategic financial consideration than an emotional decision to be part of a local movement.

Financial and Societal Goals

Firms will also have better access to public investors if their vision is to solve socially relevant problems such as the cure of diseases, fight poverty, or make another relevant contribution to society. The reason is that these firms will generally find it easier to connect with potential investors, as the discussion is not only on a financial level, but also on a higher emotional level. In fact, such investments might even offer an "emotional hedge," at least early on: In the case of failure and capital loss, the investors could find comfort in the fact that they have at least tried to do something good for society (and make money in the process).

A case in point of a firm that successfully uses DPOs to finance the development of its product pipeline is Switzerland-based InnoMedica, whose ambition is to revolutionize the way drugs are distributed in the body, with first promising applications in cancer treatment as well as the treatment of neurological diseases.

The firm has successfully conducted 6 DPOs between 2013 and 2018 to raise approximately 25 million from more than 600 investors. See here for the subscription offer for the latest DPO in March 2018 and here for an overview of the documentation surrounding the DPO.

Presumably, the fact that most potential investors had direct or indirect experiences with the horrors of cancer and the severe side-effects of classical cancer treatments, made it easier for the firm to raise capital, at least early on. After all, the firm pursues a nobel cause. 

In turn, the firm benefitted from the broad shareholder base because it secured a certain amount of financial flexibility as well as strategic and operational independence of the founding team. An alternative financing policy using venture capital or private equity would most likely have triggered substantial changes in the way the firm is organized and operates, as these providers of capital usually assume an active role in their target firms' management.