George Deeb of RedRocket Ventures, a growth consulting, executive coaching, shared executive and financial advisory firm based in Chicago says that startups need to forget about the IPO as an exit and focus on other options.
Hopefully, you are not already thinking about an exit for your startup. But, it is always good to have a sense to what your long term exit options are, in case prospective investors (or you) are curious about how to liquidate their investment down the road. Your exit options basically come down to: (i) selling the business outright; (ii) merging the business into another entity; and (iii) taking the company public. We will discuss each of these options below.
Selling your business outright is your most logical exit opportunity for most startups. Here, we are talking about selling to a corporate or financial buyer that sees value in what you have built (e.g., your technology, market share, client list, cash flow, growth vehicle for them). So, make sure value has actually been created in your business over time, to attract a buyer long term. Most buyers are going to look to management to stick around for at least some period of time, to help transition the business.
Corporate buyers will need a 6-12 month transition and financial buyers could require you to stick around longer term to lead the next phase of the company’s growth. In this scenario, you have sold 100% of the assets or equity of the business, depending on the deal structure, in exchange for cash, equity or other compensation, either paid up-front or spread out over time.
In the merger scenario, it is largely the same as a corporate sale, but instead of selling 100% outright, perhaps you merged with an equally-sized, similar business in a 50%/50% merger. In such case, you most likely took equity, instead of cash up-front. Which means, you would need to create a mechanism for the merged business to distribute funds to you over time, to repurchase your 50% stake with cash from operations or otherwise. And, in this scenario, the combined entity may not need your management team, since they already have a team in place running a similar business.
Although cash sales for 100% are my preference, deals like this can sometimes make sense where a bigger entity may be more appealing to a long term buyer (e.g., you are too small to attract buyer interest on your own, but combined with a bigger business you are more attractive). And, this road also makes sense when you are trying to phase out of the business, but don’t need immediate cash to facilitate your exit.
As for an IPO, “fuhged about it” (said with my Robert De Niro accent). Very few startups reach the scale of being able to take it public, and of the ones that do, only the creme-de-la-creme actual do go public. And, for most of the last few years, the IPO markets have basically been closed altogether based on poor market conditions, and only recently have premium companies like LinkedIn, Zynga, Groupon, Facebook and Pandora decided to give it a shot. And, if you are lucky enough to build a successful business like that, running a public company is a complete pain, dealing with public shareholders, reporting quarterly earnings and disclosing all your financial information to all your competitors.
Unless the valuation upside is materially higher than a corporate sale route, I suggest avoiding the IPO route altogether.