Startups Opt For Microcap Mergers To Tap Public Markets

March 2, 2023

Author - Joanna Glasner

Source news.crunchbase.com/ma/startups-microcap-mergers-nasdaq-molekule-urgently/

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.

A few recent examples:

• Molekule, a maker of air purifiers that raised over $95 million in venture funding between 2016 and 2020, went public in January through a merger with AeroClean Technologies, a publicly traded, South Florida-based air hygiene company valued at the time around $50 million.
• Urgently, a roadside assistance provider that raised nearly $40 million in venture funding from 2014 to 2019, is merging with Otonomo, a connected auto company that has seen its share price plummet since going public via SPAC in 2021.
• Gryphon Digital Mining, a startup aiming to be a carbon-negative bitcoin miner, announced plans a month ago to merge with Akerna, a Nasdaq-traded cannabis company. Under terms of the agreement, Akerna is selling its cannabis software assets, and the company will change its name to Gryphon Digital Mining.
• Soylent, a maker of meal replacement shakes that raised over $130 million in venture funding between 2013 and 2017, became a unit of Nasdaq-traded consumer brands company Starco Brands last week. Though this was an acquisition, not a merger, it does have the effect of adding the Soylent brand to a publicly traded platform.
• Kineta, a venture-funded developer of cancer immunotherapies, made its market debut in December through a reverse merger with Yumanity Therapeutics, a developer of therapies for neurodegenerative disease that had itself gone public through a reverse merger two years before.

Synergies for stocks without a lot to lose

Why are many of these deals happening? Looking at press releases touting these combinations, there’s often talk about synergies.

Urgently and Otonomo tout that their tie-up will provide “meaningful cross-selling revenue opportunities and cost savings.” Molekule and AeroClean boast that their deal “establishes an industry-leading provider of premium, FDA-cleared air purification products."

Starco CEO Ross Sklar, meanwhile, pitched the Soylent purchase as a way to “get our products to everyone on Earth who needs and deserves affordable, complete nutrition.”

Synergies, of course, are a good thing. But looking at stock market performance prior to these transactions, however, 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.

Among deals classified as reverse mergers, the transactions also typically offer a way for a private company to get a Nasdaq listing at a lower price than launching an offering from scratch. The math works best when the former public company was already trading at a low valuation.

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. AeroClean shares, for instance, surged after disclosing its Molekule merger plan in October. (Shares of the combined company, which now goes by Molekule, are now back around where they were before the deal news.)

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

.Illustration: Dom Guzman