Startups Opt For Microcap Mergers To Tap Public Markets

Source: news.crunchbase.com — By Joanna Glasner, March 2, 2023

Most years, at least a few buzzy startups manage to carry out high-profile IPOs. But lately, with the window for large new offerings frozen shut, those debuts aren't happening. Instead, what we do see are smaller deals in which venture-backed startups are tapping public markets through combinations with Nasdaq-traded microcap companies. Transactions, which take the shape of mergers, reverse mergers and M&A deals, involve companies in similar industries as well as disparate ones.

• Molekule, a maker of air purifiers that raised over $95 million in venture funding, went public through a merger with AeroClean Technologies.
• Urgently, a roadside assistance provider that raised nearly $40 million in venture funding, is merging with Otonomo, a connected auto company.
• Gryphon Digital Mining announced plans to merge with Akerna, a Nasdaq-traded cannabis company.
• Soylent, a maker of meal replacement shakes that raised over $130 million in venture funding, became a unit of Nasdaq-traded Starco Brands.
• Kineta, a venture-funded developer of cancer immunotherapies, made its market debut through a reverse merger with Yumanity Therapeutics.

Synergies for stocks without a lot to lose

Looking at press releases touting these combinations, there's often talk about synergies. But looking at stock market performance prior to these transactions, one sees another narrative as well. By and large the public companies involved in these transactions have market caps and share prices beaten down to levels so low they have comparatively little to lose. Starco, for instance, with a market cap around $50 million, is worth about what Soylent raised in just its Series B round nearly six years ago. AeroClean was below $3 a share before the announced Molekule merger. Otonomo was trading close to 50 cents a share.

Brands get a public market following

For venture-backed startups, these smallish mergers and reverse mergers offer a way to access public markets in a pretty low-key manner. There's usually no road show, no ringing of the opening bell, and limited media coverage. Unlike a breakout IPO, there are also usually no big gains when a combination closes, although markets do react when it's first announced.

At the end of the day, however, brands going public even at a microcap valuation do get the higher profile and potential capital-raising options that come with a ticker symbol. If their businesses show growth and a path to profitability over coming quarters, we should also expect to see valuations rise sharply.