Dream of an IPO, but Plan for an Acquisition


It’s now very clear to me: a successful M&A exit is far more likely for entrepreneurs than the once vaunted IPO. Structural changes in the venture-IPO ecosystem over the past 15 years have made it increasingly difficult for young companies to successfully tap the public markets to fuel their continued growth. While this fact has significant negative consequences for long-term job growth in America, it does not leave startups without hope. Increasingly, the exit pendulum has swung in long-term favor of M&A transactions as multinational corporations have retuned their own innovation models in favor of acquiring outside companies versus internal development of innovation. As a former CEO, I tend to shy away from strategies that require events to occur over which I have very little visibility, and absolutely no control, to make my business plan work. Building startups for acquisition has always been a cornerstone strategy of Allegis Capital and we have had great success, but now acquisition is becoming the only viable strategy for many of today’s start-ups.

The good news is that the M&A market, which has been showing increasing signs of vigor in recent months, is likely to post a healthy showing this year and soar in 2011. This was the prediction of Jamie Montgomery, CEO of Montgomery & Co., at the May 2010 Allegis Capital limited partners meeting in California, and it makes sense to me. Acquisitions of venture-backed companies have always been strong—about 450 a year, on average, compared to a long-time average of 85 venture-backed IPOs annually. This year, Montgomery predicted the number will be even higher—450 to 600—and then soar to 750 to 900 in 2011, or twice the peak between 2005 and 2007. “I still think 95 percent of venture-backed exits will be M&A transactions over the next five years,” Montgomery told our audience.

This is entirely predictable, if you think about it. After a year of near-record lows in M&A activity, conditions are ripe for startups to attract strategic buyers. Prospective buyers have been sitting on cash and their new product cupboards have grown bare at a time when demand is clearly increasing. Corporations have increasingly been relying on startups for R&D for years; things have simply gotten worse because of the severity of the recession. One data point is that Robert W. Baird & Co. recently reported a 93 percent increase in U.S. middle market M&A transactions in March, the largest monthly deal count since June 2000.

The bad news is that the outlook for IPOs of venture-backed startups is relatively bleak. Sure, companies like Facebook and probably Twitter will go public at some point at enormous valuations and create a big stir, but they are clearly the exception. There will almost certainly be substantially more IPOs this year than last—some experts predict as many as … Next Page »

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Robert R. Ackerman, Jr. is the founder and managing director of Allegis Capital, a Palo Alto, CA-based early stage venture capital firm that specializes in cybersecurity. Follow @allegiscapital

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