Why are so many 3D print companies “going public”?
If you’re been reading our pages in the past year, you’ll no doubt have noticed many stories describing this company or that company “going public”. This is the process of transforming the company from a privately-held entity into a publicly traded one, where anyone could buy or sell their stock on a public exchange.
There are two approaches for becoming a public company, and both have been used by the companies we track in our weekly “Who’s the Biggest in 3D Printing” series that appears each Sunday morning.
One approach is called an “IPO”, or “Initial Public Offering”. In this approach a company undergoes a difficult paperwork process to essentially apply to the authorities to appear on a trading exchange. It involves a significant amount of lawyer time, as well as brokers to pre-sell securities and ensure the company’s stock value is reasonable when the first public trades occur.
The second approach is to use a “SPAC”, or “Special Purpose Acquisition Company”. A SPAC is basically an empty holding company that does no business of its own. As a “blank” company, it’s far easier to IPO than an established company with financial history, staff, worldwide operations, etc.
Entrepreneurs set up SPAC, place them on an exchange and then wait for a partner. A partner like a privately held 3D print company wishing to go public. Then a backdoor deal is struck in which the SPAC owners are paid to “buy” the private 3D print company, effectively placing the operation on the stock exchange under the SPAC’s listing. There’s usually some cleanup as the trading exchange symbol is changed, as well as the name of the listing. The end result is the 3D print company appears on the stock market with a new symbol and their own name, with far less effort and expense than doing a full IPO.
But why go to all this trouble? What is it about publicly traded companies that is so attractive? In fact, there are many detriments, including the requirement to publicly release financial and operational information, answer questions posed by any shareholder and more.
There are several key reasons for taking this big step into the markets.
This one is an obvious possibility, but the simple fact is that when a founder or early stakeholder in a company wants to “cash out”, it is often very difficult to do so. Privately-held shares have to be sold in a one to one manner; the seller has to literally find a buyer and negotiate a price. Usually this happens at a discounted price unless the company is having a boom.
For early shareholders this may be one of the only ways to get cash from the venture. It’s like buying a house, then seeing its value grow over several years. While the house may have value, you don’t have any cash until you sell. And you can’t sell very easily because you’re not a real estate agent.
The public offering allows these shareholders to immediately sell their holdings at a profit without issue. Sometimes they do, but others may hold on for greater gains later.
A second reason for a going public is to raise money.
From the moment of conception, the company’s share may be worth a designated value, but again, there is not necessarily any cash to use in company operations. The act of going public effectively sells a quantity of shares to the public in exchange for some cash. In many cases, it is a huge amount of cash.
This sudden influx of cash can allow the company to survive for years, and more importantly expand operations in ways it could not have contemplated without the cash.
Sometimes the company needs to implement a new product or service that is of a critical nature. However, if the cash required to do the development isn’t present, then where does it come from? A public offering often easily raises enough operating cash to undertake very large projects, and that could be one reason for going public.
Often public offering cash is used to expand company operations, typically by expanding the sales and distribution organizations. It’s important to have as many people as possible selling your product, so adding more resellers, regions and bundles is extremely important.
However, in recent years it has become clear to all the major players that it is critical to offer not just one 3D print process: it turns out manufacturing clients almost always need multiple processes to get their work done. Meanwhile, most 3D print companies begin by inventing a single process. If their clients need something else, they go elsewhere. And if they go to a competitor that also offers the same process as they do, then the client won’t be coming back.
It’s now a critical strategy to “cover all the bases” with multiple 3D print processes. It’s even more important when several competitors are taking this strategy: those who don’t will fall behind.
What is the fastest way to do so? That’s easy: buy other companies that do offer them.
How do you pay for these acquisitions? With the public offering cash, that’s how.
It’s not surprising to see the recent series of public offerings, and there’s definitely more to come.