Latest / The Startup Exit Podcast with Fexingo: IPOs, Acquisitions, and Founder Liquidity Events / How Founders Use Reverse Mergers for Public Exits
Transcript
- Lucas: When you think about taking a company public, the typical image is an IPO — a roadshow, a bell-ringing ceremony, a first day pop. But there's a quieter, faster route that's been around for decades, and it's having a moment right now: the reverse merger. Luna: A reverse merger — where a private company buys a public shell and essentially slides into its listing. It's not new, but it's been making a comeback for certain kinds of founders. Lucas: Right. And the timing is interesting. As of mid-July 2026, we're seeing a market where IPOs are still expensive and time-consuming. The average traditional IPO takes around six months from filing to pricing, costing anywhere from three to seven million dollars in underwriting fees, legal, accounting. For a company that's not a household name, that's a serious barrier. Luna: So who's choosing the reverse merger route instead? Lucas: The classic case is a company that's already generating revenue — maybe even profitable — but isn't big enough to attract the big institutional investors that an IPO requires. Think of a regional healthcare chain, or a niche industrial manufacturer. These are companies with maybe fifty to two hundred million in revenue, solid margins, but they don't have the brand recognition to get a big underwriter behind them. Luna: And the shell itself — what does that look like? I imagine it's not a clean empty vehicle. Lucas: Typically it's a company that once had operations but has since sold them off or wound down. It still has a listing on a stock exchange — often the Nasdaq or the NYSE American — and a shareholder base, but no real business left. The shell trades at a low price, sometimes pennies. The private company acquires a controlling stake, then merges its business into the shell. The shell changes its name, its ticker, and boom — the private company is now public, without ever filing an S-1. Luna: But the SEC doesn't just wave that through, right? There's still scrutiny. Lucas: Absolutely. The reverse merger has a reputation problem — partly earned. In the early 2000s, there were a lot of frauds using shells, companies that inflated revenues or hid liabilities. The SEC tightened the rules in 2011, requiring that the resulting company meet the same listing standards as any other public company. So now you have to file audited financials, go through a thorough review. But it's still faster than an IPO — often eight to twelve weeks versus six months for an IPO. Luna: And cheaper. I've seen estimates that a reverse merger can be done for under a million dollars, all in. Lucas: Exactly. That's a huge difference for a company that doesn't want to dilute itself with the 5 to 7 percent underwriting fee that an IPO would demand. Plus, the shell already has a shareholder base — small, often retail-focused — but it's a base. You don't have to build a new book from scratch. Luna: Let's talk about a concrete example. Grab Holdings went public via a SPAC merger with Altimeter Growth Corp. in 2021 — that's not a reverse merger per se, but it's similar in spirit. Do you see reverse mergers as a viable alternative now that SPACs have cooled off? Lucas: SPACs had their boom in 2020 and 2021, but the market turned. Many SPACs traded below their ten-dollar trust value, which soured the whole ecosystem. Reverse mergers never had that same hype cycle, so they didn't suffer the same backlash. They're more of a quiet back door. And right now, with the IPO window being somewhat unpredictable — we had a few big tech IPOs in 2025, but 2026 has been choppier — founders are looking for certainty of execution. Luna: Speaking of choppiness — look at some of the big names this week. META up almost 8 percent, COIN up five and a half. But Tesla down 3 percent. It's a mixed tape, and that makes timing an IPO even harder. Lucas: Right. If you're a founder and you try to time an IPO perfectly, you're at the mercy of market mood. A reverse merger decouples you from that a bit. You're not doing a roadshow where sentiment can shift day to day. You negotiate the deal with the shell's board, get your financing lined up, and you're public on a set date. There's less volatility risk. Luna: But there's a downside too — liquidity. A lot of reverse merger stocks trade thinly because they don't have the institutional coverage. And without analyst coverage, the stock might not get the valuation it deserves. Lucas: That's the trade-off. Speed and cost versus depth of market. But there's a way to address it: many companies do a reverse merger and then follow up with a small public offering, or a PIPE — private investment in public equity — to bring in institutional money and provide liquidity. It's a two-step process. First get listed, then attract the big investors. Luna: I've also heard of companies using reverse mergers to cross-list — say, a Canadian company wanting to trade on the Nasdaq without doing a full US IPO. They find a US shell and merge into it. Much simpler than a full SEC registration. Lucas: That's a good point. And it's not just Canadian companies. I've seen Israeli, Australian, even European firms use this route. It allows them to access US capital markets without the overhead of an international IPO. Luna: So if I'm a founder listening, what should I be thinking about? What's the checklist? Lucas: First, find a clean shell — one with no hidden liabilities, no outstanding lawsuits, no toxic debt. That's critical. You need a good law firm that specializes in reverse mergers. Second, make sure your financials are audit-ready. The SEC will require three years of audited statements. Third, consider your shareholder base. Shells often have a scattered group of retail investors, some of whom might be disgruntled. You may need to do a reverse stock split or a cash-out of small holders to clean up the cap table. Luna: And then there's the stigma issue. Some institutional investors still view reverse merger companies with suspicion. How do you overcome that? Lucas: You overcome it by being transparent. File all your financials on EDGAR. Hold investor calls. Get audited by a reputable firm. Over time, if you perform well, the stigma fades. Look at some of the companies that went public via reverse merger five or ten years ago — many are now fully covered by analysts and trade at reasonable multiples. Luna: It's interesting how the conversation around exit strategies has evolved. We've talked about IPOs, direct listings, SPACs, and now reverse mergers. Each has its own set of trade-offs. Lucas: And that's exactly why we do this show — to give founders a full menu of options. Because the path to liquidity is never one-size-fits-all. Luna: And speaking of the show — we keep these episodes ad-free because we think that's the right way to have this kind of conversation. If the episodes are useful for what you're building or running, the best way to support that choice is at buy me a coffee dot com slash fexingo. Lucas: Yeah, really appreciate everyone who chips in. It lets us focus entirely on the content, no sponsors to answer to. Luna: So back to the mechanics — one thing I haven't asked: what happens to the shell's original shareholders after the merger? Lucas: They typically end up with a small percentage of the combined company. Depending on the deal structure, they might get a cash payout or shares in the new entity. The goal is to minimize their dilution and get them on board with the new business. Sometimes they're happy to take a small premium and exit. Luna: And the shell's management — usually they resign and the private company's management takes over. Lucas: Exactly. It's essentially a change of control. The private company's board and executives run the new public entity. Luna: One last question — are there any industry trends you're seeing right now? Any sectors where reverse mergers are particularly hot? Lucas: I'm seeing a lot of activity in healthcare services, especially telehealth and home health. Also in clean energy — some smaller solar and battery companies that aren't big enough for a SPAC but want to be public. And interestingly, a few AI startups that have been around for a while and are generating revenue but don't have the hype of a new OpenAI-style company. They're using reverse mergers as a pragmatic path. Luna: It's a reminder that 'going public' isn't just one thing. It's a process with many doors. Lucas: And for the right company, a reverse merger is the door that opens faster, cheaper, and with less fanfare — but still gets you to the same place: a public listing and the liquidity that comes with it.