What's Your Exit Strategy?
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In the 1990s, the aspiration of every VC-backed company was to go public. Especially in the second half of the decade, the IPO was a magical accomplishment. Once a company went public, it was special and valuable, and the entrepreneur was a rock star.
During this period, every entrepreneur I met talked about his goal of taking his company public as his exit strategy. Every company pitch I saw had a slide titled "Exit Strategy" and had "Go Public" as its headline. The fallback strategy was "Be Acquired."
Going public seemed like a great idea at the time, but by 2002, it was an excruciatingly painful experience. That year, I sat on the board of directors of four public companies. At one point, every company was trading at a price below $1, at risk for delisting, and spending a ridiculous amount of energy discussing its crummy stock price and trying to figure out what to do about it.
In many of these cases, the entrepreneurs and the investors hadn't achieved their magical exit strategy moment. Instead, they were all holding stock that was worth very little and extremely difficult to sell. In addition to the challenge of building value in an entrepreneurial company, they had the added challenge, regulation and liability associated with being public.
During this same period, I was involved in many companies that were acquired. While this was often the fallback strategy described on the ubiquitous "Exit Strategy" slide, the process of the acquisition was almost always significantly easier than the process of the IPO. More important, the liquidity was often immediate, as many buyers paid with cash. In cases where the buyer paid with public company stock, there was always a big negotiation around the form of the stock, which usually turned out fine for the sellers.
Over time, I started hearing a new VC cliché: "The IPO isn't an exit strategy--it's a financing strategy." While this is clever, it's not sustainable, as public markets aren't a particularly good source of long-term, stable investment capital in speculative high-growth companies. The appetites of public market investors are constantly changing in the search for short-term profits. Just consider the current shutdown of the IPO market for emerging tech companies--although this January saw the filing of two IPOs (OpenTable and Medidata Solutions) for the first time in many months.
While some IPOs I've been involved with had great outcomes, some also had unhappy endings. In contrast, most of the acquisitions I've been involved with had favorable results. That said, I don't prefer an IPO or acquisition as an exit strategy. Instead, if I'm smart about the amount of money I invest in a company and work hard with the entrepreneur to build something valuable, I've found the exit will take care of itself at the appropriate time.
Brad Feld has been an early-stage investor and entrepreneur for more than 20 years. He is a co-founder of Foundry Group , an early-stage VC firm. Brad blogs at feld.com and askthevc.com , runs marathons and lives with his wife and two golden retrievers in Boulder, Colorado, and Homer, Alaska.