Startup CEOs: when is it the right time to sell?

The Blackroom Team
The Blackroom Team

Deciding when to sell your startup is a complex and multifaceted decision that requires careful consideration of a range of factors. Some entrepreneurs may be motivated by financial gain, while others may be seeking a strategic partnership or simply looking for a way out of a difficult situation. Whatever your reasons may be, it is essential to approach the decision to sell with a clear understanding of your goals and a comprehensive approach of the market.

Financing for startups fluctuates based on the various stages of a company's existence. Investors deposit money into businesses with one goal in mind: to receive a return on their money. In the first few years of a startup's existence, early-stage VCs, business angels, and other types of investors do not anticipate a liquidation event. However, in years 5 to 10, they will likely become apprehensive if no such event is imminent.

So you may be wondering, what exit options and strategies exist for startups and investors? Let's review them.

4 options for entrepreneurs and investors to exit

1. Startup acquisitions

The most common exit strategy for entrepreneurs is to sell to a larger company for a profit. Likewise, for investors.

The buyer acquires the startup using cash or stock as compensation, and the startup's key executives and employees typically remain for a period of time in order to cash out and vest their stock. Exits provide startup investors with capital, which they can then return to their limited partners (in the case of VCs) or to themselves (in the case of business entrepreneurs).

According to Pitchbook, European VC-backed exits reached their third-highest total in value and second-highest deal count (more than 1,100) in 2022. However, much of that took place in the first half of the year, as worsening market conditions compressed valuations. Startup acquisitions are much more common in the United States than in Europe, but there has been a recent surge in the number of European acquisitions.

In Silicon Valley, acquihires (acquisition + hiring) are a different form of acquisition that is very common. In this instance, the consumer is less interested in the product than in the team, the talent, and it is crucial to have a development partner with a scalable team. Acquihires frequently result in the discontinuation of the acquired products or services, and employees who are transferred to a new company typically receive substantial hiring incentives.

Acquihires tend to occur at an earlier stage than large startup acquisitions, so they provide business entrepreneurs and VCs with less capital on average.

2. The initial public offering (IPO) as an exit strategy

There comes a time when mature and established technology companies can no longer raise capital from VCs or private equity firms. So, what's the next step? An IPO.

Initial public offering (IPO) refers to the sale of a significant number of a company's shares to institutional and non-institutional investors as part of a company's listing on a stock exchange. These large companies are the stuff of which VCs fantasize, as they frequently provide substantial capital to all parties involved (founders, early employees, and investors).

The NASDAQ and Wall Street have been the primary markets for European businesses seeking an IPO for a very long time. In recent years, however, companies such as HelloFresh, eDreams, Trustpilot, or Rocket Internet have chosen to go public on the Madrid, Frankfurt, or London stock exchanges. According to Pitchbook, there were 17 IPOs in Europe in 2022, a 90% drop from the previous year.

When it comes to going public, an interesting trend in the startup world is that more and more companies are taking longer. This is a result of the abundant capital available to startups from VCs, private equity firms, and other investment institutions. With poor performance from tech companies in the public markets over the past years, corporate acquisitions dominated the exit landscape in 2022.

3. Mergers & Acquisitions

These transactions, also known as M&As, typically involve a merger with a comparable and larger company. This type of exit is frequently chosen by large corporations seeking complementary market skills, and acquiring a smaller startup is a better method to develop a product than developing it in-house.

Mergers are less common than initial public offerings and direct acquisitions

4. Selling a startup: the opposite path

Similarly to how not every startup needs to raise money from VCs and business entrepreneurs (bootstrapping is an option), not every startup needs to sell itself to a larger company to provide a return to founders, employees, and investors.

Companies that are able to establish a solid business model and sufficient scale may elect to remain independent and reinvest their proceeds. A portion of these profits can also be distributed as a dividend to investors, providing liquidity to outside partners while evading the public markets and their obligations.

When is the most appropriate time to exit?

At conferences and private meetings between investors and startups, this query is frequently posed. When do I transfer my business? When is the optimal time to seek buyers? When should I, as an investor, begin to seek a return on my investment?

Would you rather sell your company for €20 million if you own a substantial amount of stock, or for €200 million if you do not?

The reality is that there is no single answer to all of the above. Startups and investors want to sell for as much money as possible, whereas purchasers want to spend as little as possible; therefore, both parties must strike a balance. For startups to maximize their selling price, common sense dictates that they should seek a departure when their growth rates are high rather than when they are highly profitable.

However, according to a recent Business Insider article, "lower-valued startups require less time to scale and less VC funding to fuel, which means founders will likely own a larger percentage of their companies when they sell." This suggests that these entrepreneurs may be better off selling for €20 million when they own a large portion of the startup, rather than waiting for a price tag of €200 million, when they may only own a small portion of the stock.

Each entrepreneur and investor should evaluate their venture's circumstances and make decisions accordingly. CEOs and investors will inevitably seek an exit, but there is no secret formula.

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