Thinking Beyond An IPO: Startup Exit Pathways Every Founder Should Know

Every founder building a company should be ready with startup exit pathways from the onset. Having a clear overview of the finish line helps you frame the company’s growth trajectory for maximum success. If you’ve set your sights on an initial public offering (IPO), think again.

Most founders now opt for a strategic merger or acquisition (M&A) instead of taking the company public. Interestingly, founders also opt for an M&A transaction instead of raising venture capital. However, know that an IPO or an M&A deal is not your only option.

But, how does that play out? How would you choose from the right startup exit pathways that are likely to yield maximum returns? How to plan for a lucrative exit that makes sense given the time, resources, and efforts you’ve invested in the company? Here’s a quick look.

1. Strategic Merger or Acquisition (M&A)

Statistics clearly indicate that close to 90% of startups eventually fail. Of the remaining 10%, at least 43% enter into strategic mergers or acquisitions. This means that most founders end up selling their companies or merging horizontally or vertically.

On the upside, the participating companies can expect maximum valuations. The newly formed brand will likely have a broader market reach and higher credibility among investors and consumers. On the downside, you should be prepared for thorough due diligence that can be time-consuming and tough.

Issues with successful integration and the extraction of maximum synergies also arise. Companies must plan the integration process carefully, as a lack of alignment can lead to collaboration failure. A mind-boggling 70% to 90% of M&As fail because of this issue.

However, if the partnership is successful, you can anticipate improved financial performance thanks to shared capital, talent, and other resources. As for the timeline, expect the M&A deal to close in around 6 to 18 months. But it is one of the most preferred startup exit pathways for founders.

2. Initial Public Offering (IPO)

Taking the company public by issuing shares that can be traded on the open market can be your final goal. Companies that go public gain market prestige, and founders can look forward to strong liquidity for future growth. However, the process is complex and can take anywhere from 5 to 12+ years.

Further, expect to incur significant costs to complete the IPO and to lose complete founder control. Once the company becomes a publicly traded entity, it is subject to regulatory compliance and scrutiny from governing authorities. Even so, IPOs are considered viable startup exit pathways.

On the upside, the hype surrounding an IPO results in better market presence and greater audience interest. Venture capitalists typically prefer IPOs as an exit strategy to get back their investment.

3. Private Equity Buyout

A private equity (PE) buyout occurs when a firm acquires a controlling stake in a company. It can execute this acquisition by infusing substantial capital and getting a majority stake along with board seats. If needed, the firm may partner with other private equity firms to jointly own the company.

PE firms are typically strategic partners committed to accelerating growth before exiting. They adopt a hands-on approach to running the company and may undertake significant restructuring of the company’s operations. PE buyouts can provide liquidity for founders seeking startup exit pathways.

On the downside, know that PE firms are more concerned with maximizing profits by cutting back costs drastically. They also manage their holdings with the objective of an exit that aligns with their 10-year investment horizon.

These goals can sometimes hamper research and development and innovation in the company. Unless, of course, the PE firm takes the company public as an exit strategy. If you, as the founder, choose this exit, expect a timeline of 2 to 7 years.

4. Acqui-Hire

An offer for an acqui-hire involves the acquiring entity taking over the seller’s team. Such transactions typically take between 3 and 6 months to close. They occur when the buyer is more interested in the team than in the company’s assets or products.

Founders whose products haven’t generated much market buzz or haven’t found the product-market fit usually accept such deals. Acqui-hires enable teams to make a smooth transition to other startups that are better positioned to utilize their skills. And, extract maximum value from it.

For example, if your skill set centers on technology and product development, an M&A deal lets you pursue your interests. You can shift your focus from managing the company’s operations to your core competency. The collaboration can provide you with the capital and resources needed for long-term success.

Startup exit pathways like these are highly advantageous for all the participating entities. The team can continue operating and benefit from the job security and availability of resources to innovate.

5. Merging with an SPAC

A Special Purpose Acquisition Company (SPAC) is a company that does not conduct business on its own. Its sole purpose is to acquire other private companies and take them public quickly. It raises funding from the market and regular investors by issuing shares.

Essentially, a SPAC is structured like a public company. By partnering with a SPAC, you can take your company public without navigating the complexities of legal procedures. You’ll save on the costs associated with them. As for the timeline, you can expect to close the deal in 1 to 2 years.

Although this is one of the startup exit pathways you can consider, be aware of the risks. Your goals and mission could misalign with those of the sponsors leading the SPAC. These sponsors invest around 1% to 2% of the funds in the IPO, but earn returns worth ~20% from the M&A deal.

6. Recapitalization

If you’re not ready to exit the company entirely, you can divest some of the risk with a recapitalization. This strategy enables you to maintain control over decision-making in the company while recovering some of your investment.

You’ll retain an ownership stake that you can sell later when the company grows further. Founders who are interested in exploring other ventures and developing new concepts often use these startup exit pathways.

The cap table undergoes major restructuring and shows a blend of equity and debt once recapitalization is complete. Aside from executing a partial exit, you can also use the funds for product development and other expansion programs. As for the timeline, recapitalization can take several months to execute.

Keep in mind that storytelling is everything in fundraising, mergers, and acquisitions. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

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7. Secondary Sale

A secondary sale involves transferring the company’s shares to new holders. This is effective for founders and investors who want to exit their investments and achieve early but partial liquidation. This exit strategy also helps them diversify their risks without impacting the cap table.

The most crucial aspect of a secondary sale is that it works for later-stage companies. Or those in the post-Series A growth stage. You’ll reach out to qualified investors and buyers with substantial capital and resources available.

8. Selling Non-Core Assets

Although not exactly in the category of startup exit pathways, this strategy can help you raise capital. You’ll liquidate some of the company’s non-core assets and monetize them without giving up board seats or an ownership stake. You’ll start by identifying assets that the company isn’t utilizing.

For instance, intellectual property (IP), which you can sell or lease out for a fixed time or a product line. Unused premises, software, or a business subsidiary can also be part of strategic divestitures. You can use the funds for different purposes, such as restructuring the company or paying off debts.

Companies may also use the proceeds to invest in other value-driving programs. These divestitures can take different forms, such as spin-offs, sell-offs, split-offs, split-ups, and carve-outs. As for the expected timeline, you can complete transactions in about 1 to 3 months.

9. Liquidating ESOPs

ESOPs, or Employee Stock Ownership Plans, are options you allocate to employees as part of their compensation. Liquidating these shares enables employees to realize their value, which, in turn, motivates them to perform better.

ESOP liquidation is typically carried out in later stages, such as after the Series B funding round. Consider this as one of the startup exit pathways that benefits employees. They can choose one of the different channels, depending on how the founder/owners are exiting the company.

• If you’ve chosen to sell the company, employees can also sell their shares to the acquiring entity. Of course, this sale depends on their vesting status, investor preference clauses, and terms of the acquisition.
• If you’ve opted for a secondary sale and divested shares to third-party holders, employees may also do the same. Again, they can only sell fully vested shares and must obtain the board of directors’ approval.
• You can buy back partially or fully vested shares allotted to employees in the option pool.
• In a liquidity event via tender offer, employees can participate in a structured program. This program enables them to sell their shares to an investor syndicate.
• If the company goes public, employees can also sell their shares in the open market.

10. Business Auction

Selling your company in a business auction is another of the startup exit pathways you can explore. This strategy enables you to extract maximum value from the sale. You’ll leverage the FOMO concept and get multiple buyers competing to purchase the company.

Working with an expert M&A consultant is always preferable, as they can guide you through the legal nuances. You’ll also get assistance with completing the transaction quickly and maintaining complete confidentiality. Expect the entire process to take anywhere from 3 to 6 months to close.

However, this timeline can be even longer depending on the complexity of your company and the buyer’s due diligence. Of course, you can speed up the process by preparing the company for a sale in advance. Providing the necessary information to interested parties can also streamline the purchase.

11. Family Office M&A

Selling to a private investor company or a family office is another of the startup exit pathways you can explore. These investors typically target industries with the potential to deliver substantial returns. They also target founders and entrepreneurs who have a track record of successful companies.

These investors are also open to backing disruptive concepts and younger entrepreneurs. They are particularly interested in acquiring companies and retaining the founders in managerial positions. Or for product development and innovation.

If you intend to sell to a private investor company, expect the sale to take between 4 and 9 months. Know that family offices have a more relationship-driven approach and focus on achieving a perfect fit before closing a deal. This is why they typically operate at a slower pace than a typical PE.

12. Shutdown or a Soft Landing

Having explored all the different startup exit pathways, here’s one more that preserves the company’s reputation. At the same time, you’ll secure the team’s interests and salvage some value from the intellectual property (IP) you’ve created. Expert startup consultants term it as a soft landing.

The shutdown occurs gradually over a period of 1 to 6 months. You’ll find new positions for the team and transfer them to other companies, complete with recommendation letters. Also, auction off the company’s assets, including IP, real estate, tools, and machinery.

Your objective should be to regain maximum returns so you can divert the proceeds to other ventures. Put the experience down to lessons learned for the next company you build. Do keep in mind that entrepreneurs who have faced failure once are more likely to build successful companies. Statistics put this percentage down to 18% to 20% of founders.

Strategic Startup Exit Pathways

Whatever may be the growth stage of your company, there are several pathways you can leverage to exit. Choose the most lucrative option that brings you the best return on investment (ROI). Your focus should be on protecting the interests of all stakeholders.

Investors, employees, pre-seed stage friends and family who believed in you, and the co-founders– look for options that benefit everyone.

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