We recently connected with Jacob Fernane, Founder and CEO of Pacific Lion LLC, a full-service equity investment and consulting firm for early-stage tech companies.
Pacific Lion makes behind-the-scenes equity investments while guiding founders through a 12-18 month trajectory of milestones that lead to a liquidity event – without using Venture Capital (VC). At the same time, Fernane and his partners consult on everything from operations to investor relations “to generate large public equity financing with better terms for founders,” Fernane said.
When Pacific Lion’s clients file for a direct listing or a micro-cap to small-cap IPO, Fernane and his partners “guide them through their first year as a public company, providing full-service corporate strategy services, including talent acquisition and board assembly.”
Our conversation with Jacob Fernane is shared below.
Crowdfund Insider: With IPOs at a 32-year low and VCs becoming pickier about where they invest, what advice do you have for companies looking to raise capital?
Jacob Fernane: Control your own destiny. Retail participation in the equity capital markets and crowdfunding space is at historic levels. Founders now have a unique opportunity to raise capital from everyday investors.
One route is through Regulation Crowdfunding (Reg CF), which allows startups and small businesses to raise capital from retail investors through crowdfunding platforms. This has only been possible since 2016: it’s a provision of the Jumpstart Our Business Startups (JOBS) Act. Under Reg CF, companies can raise up to $1.07 million in a 12-month period without registering with the Securities and Exchange Commission (SEC), which can be costly and time-consuming.
Regulation A+ (Reg A+) is another provision of the JOBS Act that allows companies to raise up to $75 million in a 12-month period from retail investors through a mini-IPO process. Reg A+ issuers report to the SEC but have a lighter burden of disclosures and reports to file.
For companies that are already public, an S-3 registration can allow them to raise more funds by registering additional securities for sale to the public.
These are all useful tools for companies looking to tap into a wider pool of potential investors and raise the capital they need to grow and succeed. The rise of the retail investor really levels the playing field — both for founders and for the investors themselves, who are often first-generation wealth builders.
Crowdfund Insider: In your opinion, what do you think is flawed about the traditional VC structure?
Jacob Fernane: There’s limited access to funding. Out of the 4,000 companies each year seeking venture funding, only 200 get funded by top VC firms.
The failure rate is also high. Most venture-backed companies don’t achieve significant success. The chances of a startup being successful after it receives funding are only 8%.
Then there’s the time crunch, which can be stressful for founders. VC firms are under pressure to generate returns for their investors within a certain timeframe, typically 5-7 years. This can lead to focusing on short-term gains rather than long-term sustainability and growth, which can be detrimental to the companies they are funding.
There’s also a loss of control that doesn’t work for many founders. VCs are structured to receive the highest returns, diluting founders’ shares. Sometimes this drives the founder’s equity below 50%. VCs can also control subsequent rounds of funding and their terms.
Crowdfund Insider: What alternatives do founders have?
Jacob Fernane: Angel investors are an alternative route. These are individuals who invest their own money in startups and small businesses. They can be a good source of capital for founders who are just starting out or have a unique or disruptive idea.
I already mentioned Reg CF, which is an opportunity for small businesses to access the capital they would otherwise have difficulty obtaining. Reg A+ has a similar outcome. And there are other ways that startups can raise funding through retail investors.
This doesn’t only improve outcomes for founders. Equity crowdfunding forms new businesses, stimulates the economy, and creates jobs. That’s why it was a part of the JOBS act.
And, as I mentioned, with historic levels of retail investment activity, there hasn’t been a better time to utilize tools like crowdfunding.
Crowdfund Insider: What tactics can be implemented on the road to going public to help mitigate founders’ dilution of shares?
Jacob Fernane: Effective capitalization table management can help to prevent dilution and protect the ownership stakes of its founders and shareholders as it prepares for an IPO or other liquidity event.
But most of all, execution, execution, execution.
Raising from angel investors or family offices can quickly produce growth capital at great terms. These investors are more flexible, willing to take on risk when they find a promising company, and generally ready to negotiate favorable terms for early-stage founders. But, in the event of an unexpected need for a capital injection, especially due to operator error, the dilution that comes is typically significant. Keep an eye on the ball and take one task at a time.
Crowdfund Insider: Amid an economic downturn, how can companies who have just gone public maintain value post-IPO?
Jacob Fernane: Contingent upon the company’s balance sheet, I’d argue that if low on cash, they should be spending significantly on investor awareness, brand identity and creating activity that raises excitement about the company and enables them to raise subsequent capital through traditional capital market instruments.
If the company is cash-heavy, this is a time in which poorly managed companies are on discount. Merger and acquisition targets will start looking better.
But, regardless, my opinion is to keep your foot on the gas pedal. It’s always better to operate from abundance rather than scarcity. In the small and mid-market space, companies that tighten up and cut jobs and expenses to preserve operating capital are going to carry slow growth upside while maintaining the high risk of an emerging growth company. That is a high-risk situation with limited upside.
There are plenty of opportunities to grow in the current environment for companies that don’t want to slow down.