The Exit Path Less Traveled: Why Strategic Acquisitions Often Beat IPOs

Strategic acquisitions often beat IPOs as the founder’s preferred exit approach, and several factors contribute to this conclusion. Every comprehensive business plan includes a well-defined exit plan, since investors expect an estimate of potential returns. They also need an approximate timeline.

Entrepreneurs building a company or investors backing it with capital and expertise are ultimately concerned with a high-reward exit. This can be through an acquisition, where the startup sells to a large enterprise, or an initial public offering (IPO). These options are undoubtedly preferable to a shutdown.

The vertical where you work or the type of products you provide often indicates the path the startup will take. For instance, if you manufacture components of another product, the exit route will likely be a sale. The product manufacturer will offer to buy you out at some point.

Let’s try another. If you handle distribution and doorstep delivery for a larger brand, expect an acquisition offer when it expands vertically. However, say you’ve created a disruptive product that has proven to be a game-changer for the industry. In that case, an IPO is the apparent conclusion.

Strategic Acquisition or IPO – Keep Your Options Open

Having an exit strategy is advisable when building and scaling your startup. At the same time, your focus should be on consistent growth, stability, and profitability while building up to higher valuations. Be open to acquisition offers since impressive valuations can give you negotiation leverage.

At the same time, a stable company demonstrating rich returns for its stakeholders can always go to an IPO. If market conditions are favorable, that’s the path your company could take. Every savvy entrepreneur understands that the business landscape is continuously evolving.

New technological breakthroughs can make existing products and operating styles redundant. Consumer buying preferences and regulatory shifts can also make or break startups. Unexpected economic downturns, geopolitical conditions, or global disasters can transform the landscape.

Your commitment should be toward building something valuable that withstands market changes and has a lasting impact. That’s the sure-shot game plan to a strategic exit. Strategic acquisitions often beat IPOs because larger enterprises and public companies use M&A as their growth approach.

Purchasing an upcoming startup with innovative technology instantly eliminates a competitor that can potentially overtake them. If the products are complementary, the larger company adds to its portfolio to reach a broader customer base.

Cross-border M&As offer tactical advantages and opportunities to penetrate new, unexplored markets. From the entrepreneur’s perspective, selling the startup opens the possibility of diving into new projects. And channeling their energies toward new projects. It’s a win-win for both participants.

Then again, if you have a winning idea with the potential to generate rich profits, you’d consider a strategic partnership.

Collaborating with a larger enterprise could give you access to its resources, including capital, expertise, infrastructure, and distribution channels. Not to mention the credibility of an established brand name as a partner.

This tactical advantage can drive exponential growth for your startup.

IPOs Aren’t Exactly an Easy Route to Take

Strategic acquisitions often beat IPOs since taking a company to an initial public offering isn’t an easy path. You’ll need to go through intense scrutiny from the public and comply with IPO regulations, not to mention incurring costs. Once the company goes public, you will be subject to market fluctuations.

Even the most notable unicorns that have gone public have faced multiple challenges. At the same time, when exploring options for a liquidity event, an IPO is a better wealth creation channel. Not only founders but investors also prefer a public offering to exit their investments.

An IPO brings a significant capital injection for the company, essential for accelerating growth. At the same time, it rewards the founder and early investors with substantial returns. A public event also establishes the company as a credible and visible player in its industry.

As it continues to scale under public and regulatory supervision, it reinforces trust and attracts potential partners, customers, and investors. Building a stronger brand presence is just another of the multiple advantages.

However, for an IPO to occur, the company must demonstrate exceptional growth potential. Only then does it make sense to navigate the expensive and time-consuming process. From the venture capital perspective, an IPO does provide more substantial returns, but there are downsides to this approach.

IPOs involve presenting financial statements to the Securities and Exchange Commission (SEC) and audits from certified accounting firms. Given a choice between an IPO and an acquisition exit strategy, running an M&A is less complex and time-consuming.

Typically, the VC investment horizon is around 10 years or the fund’s lifetime. The fund’s general partner (GP) is usually interested in exiting the investment within this time frame. Accordingly, an M&A aligns well with their exit strategy and with much less public scrutiny.

Comparing Strategic Acquisitions vs. IPOs

Here’s a quick overview of how strategic acquisitions stack up against IPOs.

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Strategic Acquisitions vs. IPOs – Timing Plays a Huge Role

Interestingly, timing plays a massive role in why strategic acquisitions often beat IPOs. During market uptrends, companies typically experience higher valuations, and investor sentiment is upbeat. In that case, investors could push you toward an exit, even if it seems premature from your perspective.

However, if the markets are bearish, finding buyers for an M&A deal or IPO pathway could be more challenging. To reiterate, VCs typically have a 10-year investment horizon and are keen on earning rich returns within this time. They may also suspect that the company’s growth is stalling and want to exit.

Further, if VCs have a board seat, they would want to capitalize on a window of opportunity when available. At this time, conflicts can arise if you believe in your vision for the company and its future profitability. Your solution is to use aggressive negotiation tactics to convince investors.

Also, prepare for investors backing out and the need to fundraise quickly to replace the lost capital. This is why savvy founders stay attuned to market conditions to anticipate investor exit strategies. Ultimately, timing your exit from the company should be a tactical move that makes sense to you.

You’ll also time your exit to align with a position of strength. Don’t wait for the company to be in a position where it is running out of runway. Or, if a market downturn is making fundraising challenging. As experienced founders reveal, it is advisable to snap up a great M&A opportunity when available.

How About the Dual-Track Approach?

Strategic acquisitions often beat IPOs, but many companies now adopt the dual-track approach. Understand that having an exit plan in place from the early stages of building your company is a smart move. Fundraising and M&A advisors tell you to run the company with that perspective.

Accordingly, you’ll line up all the requirements for a potential M&A deal from the early stages. And that includes compiling due diligence materials and bringing legal and financial advisors on board. You’ll also list potential buyers and run valuations to estimate the price for the company.

Having a potential IPO on the back burner is advisable. You’ll continue scaling the company and running top-notch operations while waiting for buyers and the right timing. However, if you’re ready for an IPO, you’ll initiate the prepping while scouting around for potential buyers and strategic partners.

Start the process by inviting proposals from underwriters to manage the due diligence and set the share pricing. This firm will also direct you on the number of shares you’ll sell, the time interval, and other aspects.

Once you’ve reviewed candidates and selected the appropriate underwriter, the next step is to compile the documents to support the S-1 IPO filing. Your team will also create the marketing and promotional materials to attract investors.

If you’ve chosen to go with the dual-track approach, you’ll run both strategies concurrently. You’ll accept the best acquisition offer at favorable terms and conditions. However, if you don’t find a viable deal, you have the IPO as a plan B.

The Dual-Track Approach – Is it Advisable?

Founders considering taking their company to IPO need to approach this strategy after careful planning. Also, factor in market sentiment before going for an IPO. Market downtrends and lower valuations could make getting enough subscribers for your shares challenging.

Keeping your options open is a good strategy; a dual-track approach can get you a great price. Then again, if you can’t get a good acquisition offer, you’d continue scaling the company and pursue an IPO instead. Having multiple exit channels also leads to higher valuations, which is beneficial.

At the same time, a dual-track approach will consume more resources. This move may not be advisable if the company is struggling or is yet in its nascent stage. Managing multiple exit approaches takes time and bandwidth away from running the company efficiently.

You could be looking at lower valuations, dropping revenues, and diminishing market share. Strategic acquisitions often beat IPOs, so you should continue working to grow the company and maximize profitability. Your focus should be on improving operations for higher valuation.

That’s how you can hope to make a profitable exit, not just for you, but also for your investors and other stakeholders.

Key Considerations When Choosing Your Exit Strategy

Although market conditions and volatility play a significant role in your exit decision, it also involves other variables. Here are the questions you need to ask:

• What is your preferred exit framework? You’d choose the IPO pathway to maintain ownership and control over the company. But if you’re open to ceding complete control and ownership, an M&A would be right up your alley.
• What is your preferred timeframe? If you’re looking for a quick exit, consider an M&A deal since an IPO is a time-consuming and more complex process.
• How crucial is the business valuation? Valuations during an IPO are more precise thanks to the regulatory supervision over the process. However, valuations during an M&A can be subjective, depending on the acquirer’s anticipated synergies.
• What is your risk tolerance? Selling your company through an M&A transaction instantly eliminates the risk propensity. However, an IPO means retaining ownership, translating into higher risk.

Before We Sign Out!

Strategic acquisitions often beat IPOs in terms of a robust exit approach. However, you’ll select the right pathway depending on several variables. Don’t hesitate to accept a great acquisition offer when presented to you. At the same time, you’ll focus on scaling the company and building brand value.

Maximizing the company’s valuation and returns for all stakeholders should be high on your list of priorities. A strategic exit channel will present itself if the company grows well and demonstrates value for customers and investors. You can pick the option that delivers viable returns for all.

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