Exit Strategies: The Underutilized and Overlooked IPO Alternative

IMG_0572The IPO is an underutilized and overlooked exit strategy for entrepreneurs and their investors.  This is a case where the prevailing wisdom, of exit through sale of the company, is myopic.  Entrepreneurs are short changing themselves and their investors by not investigating this alternative.  Building a company is such hard work.  Why short change yourself in your final act?

The IPO has a bad knock for incredibly valid reasons—potential litigation, quarterly earnings pressure, the ongoing expense, to name a few.  That, however, is seeing the glass half-empty.

When an entrepreneur answers the standard investor question:  What is the exit? I feel like I am hearing the thundering herd.  Believe it or not, there is more than the standard “being acquired” answer.  Having the penultimate goal of being acquired is a bit like going to a dance and waiting to be asked to dance.   You’re not in control.  You can dress yourself up, and make yourself as pretty/handsome as possible, but you’re not the decision maker.  Why not take your future into your own hands?

People are forgetting about the ‘two step.’  Go public, and if it makes sense thereafter, look to be acquired.  At least you get a public market price, which for most companies will be more than a company sale price, and then you achieve a premium to market when you sell the Company.  Do you think there’s any relationship between the mono-exit strategy and the historically low venture capital returns?

As shareholders in a publicly-owned company, the entrepreneur and their investors can continue to benefit from their investment.  A smart strategy is to sell a portion of your stock, and maintain ownership of a remaining portion.  Or put in place a selling program whereby you sell a certain number of shares each quarter.  In addition, there is always the alternative to sell all you stock in the market, for investors needing full liquidity.

To execute a successful IPO, the bar is higher in terms of the market capitalization requirements, and profitability.  But does the market cap really have to be that high??  We have a chicken and egg problem.  Companies won’t go public if they believe investors will not invest in small caps.  And investors won’t focus on small cap companies if they believe there are too few small caps.

All of this evolved from the Sarbanes Oxley Act (“SOX”), which overnite made being a public company much more onerous and expensive.  I’ve been told that a public company has additional G&A expenses of one to two million dollars per year—read unproductive– expenses.  I’ve also been told by some CEO’s that the expense is vastly overstated, and that it’s possible to comply with SOX for much less than that $1 to 2 million figure.

Let’s talk about the positive aspects of being a publicly traded company.  One of the first things my clients did upon becoming a publicly-owned company was to look very seriously at potential acquisitions.  Finally, they had currency, in both stock and cash, with which to make acquisitions.

Yes, there are some lovely exits, such as Tumblr, through acquisition.  The reality is that the probability of a Tumblr exit is akin to being struck by lightening:  possible, but improbable.

You might wonder why, as an M&A house, I’m advocating IPO’s.  It’s simple:  in that modality I have far more potential clients.  Both in companies to buy my clients, and companies as potential clients.  We all benefit when the size of the pond increases.

When I’m negotiating with a potential buyer for my client, it is much more compelling when I can say that the alternative for my client is an IPO.  In the past, that alternative in and of itself has increased the sales price dramatically.  There were a periods when one to two companies per week were being purchased for their IPO price, or more.

Now there’s the problem of finding an underwriter for small cap IPO’s.  We’ll discuss the dynamics of the underwriter issue later.  The investment banker’s typical lament is that the economics don’t work for smaller sized offerings.  Horse feathers.  Let’s just say, for now, that ‘size’ has many meanings.

What is your experience?  This is a topic where people have distinct, firm viewpoints.