If you have a startup and you’re venture backed, then you ultimately need an exit. Historically, this has been through M&A or by going public. However, with the exception of some SaaS deals, there’s not been a lot of M&A activity recently in the consumer space. Strategic buyers often feel many startups are overvalued and aren’t interested in paying the premiums. The alternative is an IPO and there’s a lot of new innovation to look forward to here. Earlier this year, there was growing support for direct listings among some high profile VC’s, namely Bill Gurley, who felt many startups were leaving “money on the table” by going through a traditional IPO. Slack and Spotify are two examples of companies that have done direct listings. His argument is that in a traditional IPO the bankers engineer the deal to get a pop for their institutional clients and ultimately the company doesn’t get to keep any of the upside. Case in point is Snowflake (SNOW) that went public yesterday via a traditional listing. The stock jumped 111% on the first day and as a result left $3.8b on the table. The downside with doing a direct listing has been the inability to raise capital as has been the case in a traditional IPO. That said, the NYSE has been working with the SEC on a way to do a primary raise concurrently with a direct listing that was recently approved but has since been rescinded as other parties pushed back. More to come here.
Lastly, SPAC’s (Special Purpose Acquisition Companies) are all the rage. They may be somewhat new in the tech space, but have been around for many years in other sectors. During my time at Jarden, Martin Franklin (CEO and Chairman) was an early champion of SPAC’s and executed multiple successful ones for companies like Burger King, Platform Specialty Products and Nomad Foods. SPAC’s enable a company to access the public markets via a reverse merger. They have hefty fees, as is the case with the traditional IPO, but on the flipside, the company also arguably doesn’t have to spend significant amounts of time preparing for a road show.
Choosing which of these three paths might make sense for your business really should center around objectives. If you need to raise cash, then consider a traditional IPO or SPAC. If you want to offer all your employees and investors instant liquidity and don’t need to raise cash, then a direct listing likely makes most sense.
And if you find a buyer for the entire business, then this may be the best option of them all especially if you feel there would be significant strategic benefit from a tie-up. Many startups that have been acquired have been able to continue to operate autonomously without having to give up too much control. I find founders get so focused on doing an IPO that they don’t spend enough time actively looking for a potential acquirer. Casper went public via a traditional IPO earlier this year and today the company is valued at <$400m (far from the $1b value in the private markets). For comparison, Tuft and Needle, another mattress startup with significantly less revenue, and less dilution given earlier stage, was acquired in 2018 by Serta Simmons for $~500m. Obviously no one could have predicted this would occur but nonetheless it shows errors of omission can be painful.