“Built to flip’ should not be a dirty phrase or unnatural act. I believe that to succeed today, entrepreneurs must not only aspire to early exits, but design that objective into their corporate structures and corporate DNA.” ― Basil Peters
Every entrepreneur starts developing their idea with the vision of having an IPO event or an acquisition by another company at some point in time. Such was the case with Instagram, a company founded by Kevin Sysrom in 2010. From the very beginning Instagram showed great traction, the first day of operations it registered more than 25k users. In less than two years it had an acquisition offer on the table from Twitter for USD$500mm, which was rejected. However, Facebook beat the market to the punch and made an irresistible offer, valuing the company at USD$1bn, giving Instagram investors USD$300mm in cash and the rest in Facebook shares. To date, it is estimated that Instagram could be worth more than USD$100bn, as much as Goldman Sachs is worth (USD$125bn). Was the sale of Instagram to Facebook for USD$1bn rushed? Should they have waited for an IPO and reached the USD$100bn value?
Entrepreneurs need to consider the different types of exits that exist and the timing of the exit.
The typical exit from a Venture Capital investment is through an M&A transaction. Usually a strategic (corporate) investor or a financial investor is looking for investment opportunities, when they detect a good opportunity, they make a takeover offer on the target company. This transaction may be for cash consideration, shares in the acquiring company, or a combination of both.
In May this year, Bill.com, a California-based accounting and financial management company for businesses, acquired Divvy, a company backed by PayPal Ventures and NEA. The transaction was a combination of company stock and cash, for a total of USD$2.5bn.
M&A transactions are often a source of liquidity for startup investors, including their founders. However, there are usually conditions that startup founders must meet in order to validate the payment received, especially when it is in shares. Among the conditions is that they must remain employed by the acquiring company for a predetermined period of time during which the acquisition of rights to the shares granted is carried out. Another relevant factor is the authorization by the competition commission of each country, which could reject the transaction, as happened in the attempted acquisition of Cornershop by Walmart in 2020 in Mexico.
Another exit mechanism used is a placement on the stock exchange as was done on 30 June by SentinelOne, a cybersecurity company from Israel with a market capitalization of more than USD$10bn. An IPO is a planned exit that requires approvals from the capital markets regulatory authority as well as the stock exchange where the company will be listed.
Investors often seek exits on the stock exchange as the valuation in the capital markets may be at a premium compared to the private markets. The listing provides a liquidity mechanism for all investors and provides an exchange currency for potential transactions for startups. Another incentive of going public is the fact that the founder stays on as CEO of the company, leading its growth and ensuring that the vision and culture established at the outset is maintained.
Sometimes the IPO, instead of being carried out through a public offering, is done in a direct listing, such is the case of Coinbase (crypto asset exchange platform) which listed directly on the NASDAQ in April this year. This allowed investors to capture the share price appreciation on the first day of trading.
A popular exit alternative these days is the listing via the acquisition of a special purpose acquisition vehicle called SPAC (Special Purpose Acquisition Corporation). This vehicle is a blank cheque that merges with the startup and allows it to be listed without having to conduct a public offering. Such is the case of SoFi, a lending fintech, which merged with a SPAC backed by investor Chamath Palihapitiya, receiving proceeds of USD$2.4bn and reaching a valuation of USD$8.65bn.
Entrepreneurs, as well as their investors in startups, are always looking for an exit beyond investment to monetize. Considering the different alternatives and the market environment will be critical to maximize the return on this eventual exit. Entrepreneurs should think about, as they approach the exit stage, the role they want to play and the control they would like to maintain in the organization after the liquidity event.
Note: Please refer to the original publication at EL CEO: Decisión de salida de la startup (elceo.com)
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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