Silicon Valley Starting To Favor IPO's Over Being Acquired
Found an interesting article that discusses the prospects for Silicon Valley startups. According to the article, many companies are now favoring IPO's over outright sales. These startups aren't receiving the same generous offers anymore; so much so that it is now worth dealing with public investors. This is also due to the success of some of the recent tech listings. Overall, it sounds like a lot of companies are starting to view IPO's more favorably compared to the past.
When it comes to choosing an exit, some closely held technology companies are betting they can get richer valuations from a public listing than from being acquired.
Until recently, startups could count on generous private funding, with the associated generous implied valuations, and avoid the perceived hassle of being accountable to public investors. If a company had both exit options on the table -- an IPO or an outright sale -- the sale option looked attractive.The pendulum is starting to swing the other way, according to Lise Buyer, founder of IPO advisory firm Class V Group.
Is this article in line with what you've seen? Will this supposed trend continue?
Reference:
IPO's Over Being Acquired
lol "starting to view IPO's more favorably compared to the past" - guessing author of the article has only been paying attention the past 3 years or so.
it's all cyclical based upon how markets are doing. companies prefer acquisitions when IPO markets are cold (past few years) but will favor IPO's when the markets are receptive.
Regardless of the valuations we might see in IPO markets (and there really isn't enough data from recent IPOs to draw a conclusion), the reality is most tech startups will never achieve the level of market traction necessary to execute a meaningful IPO. Ergo, strategic acquisition or selling secondary shares to a financial sponsor will be the only way for most founders to take chips off the table.
PE firms and the largest tech companies are still sitting on record levels of unused cash, and competing heavily for good companies to buy into. Personally, I don't think there's enough evidence to think IPOs will steal the show as of yet.
What really is sad is that these tech startups will sell their shares as "alternative investment" by making ads and pitching folks to spending hundreds of dollars to invest in them, saying that it will be worth it once they are acquired.
I'm not sure I understand what you're saying. Despite the stereotype, most startups are not in the business of selling ads. Most subindustries within AdTech/MarTech are no longer interesting to VCs, as almost every subcategory is severely oversaturated. Few social networking sites get funding today. Also, no one is investing "hundreds of dollars" a piece into startups (unless you meant thousands or millions, or you're talking about equity crowdfunding, which is how less than 1% of startups get their money.) Finally, startups never frame their pitches as "alternative investments".
If so, another data point that suggests that tech is a bubble.
Do most of these start up guys want to be public? Seems like a real PITA to be accountable to public shareholders and also really precludes you from starting anything else. If you're an entrepreneur, wouldn't you want to truly cash out except for some MGMT equity and let the sponsor take it public? You get a fat check, start something new, and then get a nice cushion after the first venture goes public.
I feel as if this isn't new news. Startup leaders in SV have been rejecting acquisition proposals for a long time. A lot of the startups have inflated egos and believe they are better than Google (even when their product is something like an app solely used for highschoolers to send nudes). Think about Yahoo. They are worth a fraction of the price of what Microsoft offered them a few years back. There is this extremely cocky vibe amongst startups that enemizes M&A, since they feel like they are better than everyone else. I'd love to hear some insight on this, even if someone disagrees completely with me.
In working with many startup founders, I've found that while they position themselves as not being open to M&A and only seeking to IPO for $1B+, after enough time on the grind most would rather be bought out even if for only a fraction of that. There's so much execution risk on the way to IPO, that even if you have a good enough company with a large enough TAM to reach this level, that day may never come. Savvy founders are aware of this, and of the headaches of running a listed company, and will almost always consider an M&A offer that isn't insultingly low.
Now I work in LMM tech M&A, so I don't have as much of a dial-in on founders of companies that are approaching unicorn valuations. There will always be the Spiegels of the world, but I don't think the majority of startup founders are too adverse to selling their companies for large sums of money.
Thank you for your input, that makes sense. I guess you only see in the news the ones who reject the multi-billion dollar deals, but seldom see the ones who make educated decisions along the way.
Also you mentioned the "execution risk" with an IPO. I'm a student so I was a bit unclear on what you meant by this. I understand that the risk of entrusting your equity value to the general public who may or may not see your vision (from an executives point of view) is present, but what is the risk in actually executing the IPO?
Sent you an SB for the informative response, thanks again.
Some of it is ego, you're right, but some of it is a consequence of VC valuations in recent years. If your investors put money in at $300 million post, you can't sell for $250 million. You probably can't even sell for $500 million, no matter how rich it might make you. But the CEO/founder can't tell the press and the employees that. They have to claim that they were undervalued. Of course, sometimes, they're right (facebook, snap).
For the record, I think this is pointing to high valuations as the cause for strategics' unwillingness to pay for the risk of owning a cash flow negative company for a year or two. The argument is that if startups want to cash out, they'll need an IPO to complete an equity sale.
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