The IPO market has been struggling in 2016, due in part to ongoing volatility in the equity markets, as well as the perception of another venture capital bubble. As a result, many startups have decided to delay their IPO launches and in some cases, abort them altogether.
Before founders abandon all hope, one alternative exit strategy to consider is a strategic transaction. Though often derided by founders as making a deal with the Devil or “selling out,” a well thought out deal with an established strategic player in their space – or an adjacent space – may not only be a good substitute for an IPO, but in many cases, even superior to it.
When it makes sense to sell or partner
The advantages of selling to a strategic player are many-fold. First and foremost, an acquisition offers immediate total liquidity. With an IPO, that may not always be the case. Sometimes, founders are subject to lockups that prevent them from selling shares for a predefined period of time. Even though valuation premiums tend to be lower in acquisitions when compared to IPOs, most of the capital raised via IPO is earmarked for growth, not shareholder liquidity.
For founders more interested in growing their company than cashing out, a strategic transaction does not always have to be an all-out sale. Forward-thinking companies with well-defined corporate development strategies are increasingly making direct investments into companies. This arrangement offers the best of both worlds for founders looking to raise funds and retain control while gaining a powerful strategic partner.
A standard M&A deal process, consisting of negotiation of terms, followed by three to six months of due diligence, is faster and less laborious than going IPO, not to mention less expensive. The average cost for a startup to go through the IPO process ranges from $250,000 to $1 million – and that’s even if the offering doesn’t go through. It also requires a massive time commitment from a startup’s executive team. For many startups, particularly those with high burn rates, M&A looks simple and inexpensive by comparison to an IPO.
On the post-merger front, joining up with a larger player offers near-instant access to new customers, markets, and sales channels. Other benefits include expanded capability in central functions like R&D and marketing, and a slew of other cost benefits driven by greater economies of scale.
From a market timing perspective, while the IPO market is cooling off, M&A activity is still red hot. Last year set an all-time record in announced deal value: about $4.3 trillion, a figure driven primarily by the 80 or so ‘jumbo deals’ (also a record) consummated in 2015. While most forward-looking prognostications about M&A activity indicate that 2016 will not reach the same lofty heights, M&A activity is still expected to be robust in the wake of 2015. It’s always better to sell closer to the top of M&A cycle, and we just happen to still be in one.
Going digital to go to market
Once a founder has decided that a strategic acquisition is in the cards, the next step is to prepare the company for a possible deal. This will include things like securing any intellectual property, getting the company’s books in order, updating business plans, amassing and organizing contracts, tax documents, and reams of other documents.
This stage is when a founder begins meeting with and evaluating investment bankers to advise them on a sale strategy. Today, though, with the emergence of specialized deal networks and other social media platforms, founders have more power at their fingertips than ever before.
Technology cannot completely replace the role of investment bankers. They are still critical to running a successful deal process. But online deal networks can catalyze new relationships and communication. They offer a discrete forum in which to “test the waters” for a deal. Armed with the knowledge gained from specialized deal platforms, founders can be more educated about their options and preferences when they eventually begin speaking with investment bankers.
Bolder founders who want to go at it alone only need a laptop and an Internet connection to market their company online. Online research databases, virtual data room providers, social media platforms, and specialized deal networks offer founders all the tools they need – minus the deal experience – to instigate their own deal, find the right counterparties, collaborate during due diligence, and more.
Social media vs. specialized deal networks
Social media’s connective power is virtually limitless, instantly and efficiently linking investors to a vast expanse of potential new investments and relationships. But one downside to social media for the purpose of taking a deal to market is the relative inability to discern qualified from unqualified buyers in massive, sprawling networks like LinkedIn.
As a result, more buyers, sellers and advisors of companies are turning to specialized deal networks to market their deals, source actionable deal opportunities, advertise their funds, fundraise, and more. Specialized deal networks are different from conventional social media networks in that they tend to be industry-specific and are exclusive to members.
Founders, buyers and investors alike benefit from connecting online in specialized dealmaking communities to form new relationships and forge partnerships, agreements and deals, whether for investments, M&A, or just plain professional networking.
Traditional social media platforms like LinkedIn and Twitter will remain important tools for marketing your company and deal-making. But founders and strategic and financial sponsors are already supplementing these channels with specialized deal networks. Consequently, we can expect such networks to continue to grow as a go-to medium for founders seeking alternative exit and/or growth strategies, as well as the corporate, private equity, and venture capital players seeking to help them do so.
By Anthony “Tony” Hill, Director of DealNexus at Intralinks.