Chapter 7 - Start Up Exits
IN THIS LESSON
IPO or Acquisition: The VC Dilemma
A venture capitalist has a dilemma when looking at your company: should he/she look at your start-up as a company to be acquired in the future? Or should he/she envision your start-up as possibly going public through an IPO? Both are different liquidation paths with divergent outcomes.
Because VCs think this way in general, it is appropriate for you to include a short list of potential acquirers in your pitch deck. You’d have to have a reasonable rationale about why you think there is alignment between your company and these potential acquirers. For example, you would not put Google as a potential suitor to acquire your company simply because you like Google and they have a lot of money. But if your company is in the access control market, such as Open Path Security, you could say that your company’s service of enabling people to use their phones to open doors aligns with Google’s strategy to digitize everything from your mobile device to your front door at home.
Now, you may be thinking that your goal is an IPO, and you are committed for the long haul to your company; you are not looking to grow your company over three or four years and then sell it for a quick buck. However, including a list of potential acquirers does not mean that you only have a short-term commitment to your company. By talking about the bigger companies that could potentially acquire your company, you are signalling to investors that you are thinking strategically about your product and your industry.
It also helps the investor see that if your company doesn’t make it to the IPO stage for whatever reason, they could make money on your company being acquired. This gives a sense of reducing risk for the investor. There are other options if the grand plan of going public doesn’t pan out. Some VCs will aim for an IPO, while many other VCs will not. The reality is that most of the space is acquisition oriented. The path to an IPO is exponentially more difficult than an acquisition.
Statistically, there are many more mergers & acquisitions (M&A) than public offerings (IPOs) each year. In 2016 there were 3,260 acquisitions of technology companies and only 98 tech IPOs, according to CB Insights. Using these numbers, a start-up is 30 times as likely to be acquired as to go public. In 2018, the number of IPOs reportedly topped 200, and this was considered a “rebound” from 2016 and 2017, but it still means that it’s significantly more likely that a start-up would be acquired than to go public.
Where it makes sense for you to go down the IPO path is when you see major success on your own. Because VCs tend to get involved in investing in companies in the later stages, there could still be a “wait and see” attitude about your company to see if you can sustain the traction in the market, such as Spotify did before they went public.
While VCs face this dilemma of IPO versus acquisition when thinking about your company, the good news for you is that you do not have this dilemma as an entrepreneur. Instead, you should focus on setting the stage for an acquisition but also remain open to an IPO. In doing so, you position yourself to benefit from the best of both worlds.