Startup exit planning: M&A or IPO

It is the dream of every Silicon Valley startup to have a refulgent IPO. Venture capitalists, entrepreneurs, employees and investors all want a positive liquidity event to drive the investment/harvest cycle, as well as increase their personal net worth. But which is more likely and which is more lucrative? Thomson Financial and the National Venture Capital Association (NVCA) have recently updated their M&A and IPO data. With the Sarbanes-Oxley Act increasing the IPO expense and the current economic market challenges, should startups plan only for IPO or hedge their bets?

Looking deeper into the 47% of successful startups, as discussed in Venture Capital and Entrepreneurial Success: The Exit Funnel and You, the 2002 through 2007 data outlines that 85% of the exits are M&A and 15% are IPOs. From a percentage perspective, M&A wins hands down. A consolidated data set from Thomson and NVCA Q108 Exit Poll Release shows:









Year by year the percentage of M&A deals versus IPO of each graphically are respectively:






Obviously, M&A is more likely than IPO, but at what cost? Are the M&A deals larger or smaller than the IPO?



From public information, data for IPO companies is highlighted above in the red curve. Since M&A deals are often private transactions, the disclosed M&A deals represent approximately forty-six percent of the total M&A deals. The blue curve outlines the disclosed average M&A transactions by year. With fifty-four percent of the deal terms undisclosed, it is challenging to draw concrete conclusion in comparing the average M&A transaction to the average IPO transaction, especially over such a short time period and an unknown curve distribution. It is inconclusive which is more lucrative M&A or IPO from this set.

Below is the data from 2007 and first quarter 2008 on the breakout of return on investment on disclosed M&A deals.



It is about an even split of companies that earned a “4x return or greater” versus “less than 4x”. Given the typical venture capital liquidation preferences, the “less than 4x return” exits were most like a wash for founders and employees, as well as for venture capitalists and investors.

From the data, startups that actually get to IPO are small number. M&A is more likely exit strategy, especially in a volatile economic environment. Based on the above data, startups need to plan for M&A and hope for IPO. Having quality venture capital to facilitate introductions and qualified corporate development talent to create the foundation, develop and manage top several acquirers is a strategy that would increase M&A potential, increase valuation, and increase personal wealth creation. However, most founders are usually infected with “The Baby Bias” and want the big IPO.


© 2008 Morris Strategy Consulting - All Rights Reserved - http://www.morrisstrategyconsulting.com/
Startup exit planning: M&A or IPO

© 2008 Morris Strategy Consulting - All Rights Reserved - http://www.morrisstrategyconsulting.com/ Musings over Silicon Valley Startups