Which drives Venture Exits – Mergers and Acquisitions or IPO?

Venture exits – Mergers and Acquisitions or IPO

In this blog, we will discuss about the exit options – Mergers and acquisitions or IPO, chosen by the startups that are either self funded or funded by Venture capitalists and whether these exit options are by choice or dictated by the market conditions.
For any entrepreneur, exiting through an IPO and choosing to access capital from primary markets is more satisfying which cannot be matched by other exit options.
Though most of the unicorns are still choosing IPO route as their preferred option especially with the stock markets at all time high, majority of the startups still end up getting acquired.

Why Mergers and Acquisition is still the chosen exit option

  • Many entrepreneurs start a business to build and sustain it for a longer period rather than looking to cash on an exit.The real truth is most entrepreneurs and VC investors are looking at their investments/business as a saleable asset rather than a real business.
  • The focus for most entrepreneurs to build a successful business is to choose the right target markets, build right core competency and then define an ideal customer based on the offerings.After that, go behind the target customer with focused investments in sales and marketing.If the business has a competitive advantage, then strengthen that advantage by maximizing investments in that area and outsource all non core business activities that are not critical.
  • These investments require funding and most of the startups are resource constrained.The startups have choices to strengthen their competitive advantage by going deep in any one area or broaden their service offerings so that they can be competitive across multiple dimensions.In case of prospective buyers/ VC investors, the depth of the startup expertise matters more than the breadth.Hence startups that have built strong expertise have higher chances to be funded.
  • In the case of resources constrained startups, the founders would do well by focusing on tasks that add maximum value even at the expense of building strong complimentary assets.
  • In the case of an economic downturn or a volatile business cycle, startup will not have the same growth rate.As cash is the king for most startups and any startup that burns cash or having negative margins are treading in a danger zone, these startups start to evaluate offers from acquirers, even at a discount.
  • Startups that do not want to face this unfavorable position should focus on strengths so that they can strengthen their competitive differentiation and build a moat around their business.At the same time, in case of a slow down the startup needs to fall back on an alternative business which can fund the constrained cash flow.This diversion of focus can affect the startup short term growth and its competitive position but the startup can survive for longer period.

Conclusion

  • Entrepreneurs and founders however grand their vision is, need to realize that they are building an asset to sell and not a business to run.
  • At the same time, the founders need to build enough business around that asset so that they can survive in market longer in case of a volatile business cycle to fend off unfavourable M&A deals and at same time position themselves for a favorable IPO.


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