Laying Down Some PIPE

A PIPE (private investment in public entity) occurs when a private investor (e.g. a VC/PE fund) purchases shares of a publicly traded company. Recently, VCs have been showing a lot of interest in PIPEs. Sunesis just announced that the company secured $43.5M in a private placement led by Bay City Capital. Other recent PIPEs include Xenoport, ATS Medical, and Stereotaxis. The main reason VC funds are doing PIPEs is because valuations of public companies have been indiscriminately slaughtered; a number of companies are trading for less than cash. Another advantage of PIPEs is that of liquidity (theoretically), especially with the IPO window closed. VCs normally don’t do many PIPE transactions. Public companies are generally left to mutual funds and hedge funds to invest in. PIPEs don’t always result in a board seat for the VC; thus no active management or much control over the investment. Another reason PIPEs aren’t too common is that a portion of the financing is spent on adhering to SEC regulations for public companies rather than improving the business; Sarbanes-Oxley is a common complaint. Liquidity is not always guaranteed; even though the companies are public, there might not be enough float to sell the shares. In the current financial crisis, some PIPEs make sense though. Unfortunately, PIPEs only make it more difficult for private startups looking to raise money.

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