PIPE investments (Private Investment in Public Entity) take a sizable position in publicly traded companies whose valuations have dropped since they went public and now are seeking new sources of the cash infusion.
Early-stage companies must normally rely on internal or angel investors for their source of capital. Private investors and venture capitalists want deals with a longer investment period and companies established business models that have recently discovered a new market. Basically, they are looking for a huge return on their investment in the shortest time possible. This feat is only attainable by a select number of businesses and other companies with less than stellar growth potential need to look elsewhere.
A private investor, or venture capitalist, would like to get a least a 30 percent return on their investment, and if a business model can’t seem to guarantee that then they typically will not lend the money. They consider many factors when making their final decisions including what your product or service can offer the marketplace, and how unique your product or service offering is. Another factor considered in the competition. If you are competing with several large firms already to obtain market share it will be difficult to get private investment from a venture capitalist.
Pipe investments are great for businesses as they provide the following:
• Apply lower and more realistic valuations to early-stage companies
• Supply the funds that the public entity needs
• And use the public markets as the investment exit vehicle