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The Evolution of Exit Strategies

The Evolution of Exit Strategies

In the fast-paced world of entrepreneurship, building a successful company can be only half the battle. Entrepreneurs may want to carefully plan their exit strategies to help meet their goals, potentially reward investors, and pave the way for future growth. Over the years, the landscape of exit strategies has evolved, with initial public offerings (IPOs) losing some of their allure and other exit strategies Special Purpose Acquisition Companies (SPACs), mergers and acquisitions, or even just the choice to remain private rising in prominence. In this article, we will explore the evolving nature of exit strategies and discuss the various options available to entrepreneurs.

The Traditional Route: Initial Public Offerings (IPOs)

For many years, IPOs were the gold standard of exit strategies. They offered companies the opportunity to raise substantial capital, increase brand visibility, and provide liquidity to early investors. However, IPOs have become increasingly challenging for startups to pursue due to the rigorous regulatory requirements and associated costs. The process can be time-consuming and demand substantial financial resources, making it less accessible for early-stage ventures. In addition, entrepreneurs may give up some control in the company and are subject to additional reporting guidelines once they do conduct their IPO.

There have only been 93 initial public offerings so far in 2023[1], which is a slight increase from the 75 seen at this time last year but is a stark contrast to the 516 IPOs that occurred in the entire year of 2021[2]. While IPOs are still occurring and many companies are preparing for IPOs, many entrepreneurs and startups are beginning to consider additional exit strategies apart from the traditional IPO.

An Alternative Route: Direct Listings

Direct listings, also known as direct public offerings (DPOs), is an exit strategy that allows companies to directly list their shares on a stock exchange, making them available for public trading. Unlike IPOs, direct listings do not involve the issuance of new shares or the involvement of underwriters who typically set the initial price and market the offering.

One advantage of direct listings is that they can provide immediate liquidity for existing shareholders. By allowing them to sell their shares directly to the public, direct listings can enable entrepreneurs, employees, and early investors to unlock the value they have built in the company. This liquidity may be beneficial for individuals seeking to diversify their investments or realize financial gains.

Moreover, direct listings may offer transparency in pricing. In traditional IPOs, the initial share price is determined through negotiations between the company and underwriters, often resulting in a “pop” in the stock price on the first day of trading. This pop can lead to a disparity between the price at which early investors sold their shares and the price at which new investors acquired them. In contrast, direct listings allow the market to determine the share price from the outset, helping foster a more equitable and transparent process.

It’s worth noting that direct listings were initially more commonly pursued by well-known, established companies with strong brand recognition and a large existing shareholder base. However, recent regulatory changes and market developments have made direct listings more accessible for a wider range of companies, including startups and early-stage ventures.

Direct listings are not as common as IPOs or other exit strategies; however, they are an equally viable option for startups.

A New Path: The Rise of SPACs

In 2020, a newer exit strategy rose to prominence. Special Purpose Acquisition Companies, also known as SPACs, seemingly took the world by storm. Offering an alternative path to going public, SPACs are essentially “blank check” companies created solely for the purpose of merging with or acquiring an existing private company, effectively taking it public. This approach is one that can provide several advantages for entrepreneurs.

Firstly, the process may be typically faster and less complex compared to traditional IPOs. By merging with a SPAC, companies can bypass the lengthy and arduous process of filing with regulatory bodies, such as the Securities and Exchange Commission (SEC). This streamlined approach can allow entrepreneurs to capitalize on market opportunities swiftly and efficiently.

Secondly, SPACs often come with experienced management teams or sponsors who may bring expertise, industry connections, and a network of investors. This can be particularly advantageous for early-stage companies looking to leverage the knowledge and resources of seasoned professionals.

Moreover, SPACs may provide an attractive funding alternative for startups. While IPOs typically require significant existing revenue and market capitalization, SPACs are more flexible and allow companies at various stages of growth to go public. This accessibility has opened up the exit strategy landscape to a broader range of entrepreneurs, helping to democratize the process to some extent.

Q1 2021 saw around 300 SPACs raising $100B[3]. However, as the investment world has begun slowing down in 2022 and 2023, SPACs have fallen from prominence as there have only been 37 SPACs so far in 2023[4]. This exit strategy is continuing to fall, and something important to note is that SPACs typically have 2 years to complete the acquisition before they are dissolved and funds are returned to investors. In Q1 2023, 71 SPACS were dissolved while a total of 145 SPACs were dissolved in all of fiscal year 2022.

The Benefits of Mergers and Acquisitions

While IPOs, Direct Listings, and SPACs have had the tendency to dominate the conversation surrounding exit strategies, entrepreneurs may not want to overlook the advantages of mergers and acquisitions (M&A) as exit strategies. M&A can allow businesses to join forces, combining resources, expertise, and market reach to help unlock new opportunities and accelerate growth.

Mergers offer the potential for synergies that can help drive growth. By combining complementary strengths and capabilities, companies can leverage economies of scale, reduce costs, and increase efficiency. This synergy may result in enhanced product offerings, improved market positioning, and a competitive edge in the industry. Through M&A, entrepreneurs can tap into new markets, expand their customer base, and drive revenue growth.

Acquisitions, on the other hand, provide an opportunity for entrepreneurs to exit the company altogether while ensuring the continuity of their business. By selling their company to a larger player, founders can cash out their equity and find an exit. This exit strategy may be particularly appealing for entrepreneurs who have achieved significant growth and want to move on to new ventures or pursue personal goals.

Other Alternative Exit Strategies:

Beyond the traditional routes of IPOs, SPACs, direct listings, mergers, and acquisitions, entrepreneurs can explore additional exit strategies tailored to their specific circumstances.

These may include:

  • Management Buyouts (MBOs): In cases where founders and management teams have a strong desire to retain control of the company, MBOs allow them to buy out existing shareholders, including venture capitalists or private equity investors.
  • Secondary Sales: Entrepreneurs can opt for secondary sales, where they sell a portion of their ownership stake to institutional investors or private equity firms, providing liquidity while still maintaining a level of involvement in the business.
  • Licensing and Royalties: For companies with innovative products or intellectual property, licensing agreements can be a viable exit strategy. By licensing their technology or patents to other companies, entrepreneurs can generate ongoing royalties and revenue streams.

Final Thoughts

The world of exit strategies has undergone a remarkable transformation in recent years. While IPOs remain a prestigious and sought-after path, the rise of SPACs, direct listings, and other exit strategies have provided entrepreneurs with alternative routes to going public, offering speed, flexibility, and access to experienced professionals. Additionally, strategic partnerships, acquisitions, and other alternative exit strategies may provide unique opportunities for entrepreneurs to achieve liquidity, help fuel growth, and pursue new ventures.

As an entrepreneur, it can be essential to evaluate the strengths, weaknesses, and goals of your business to select the most suitable exit strategy. The evolving landscape presents a range of options to consider, and with careful planning and guidance, entrepreneurs can navigate the exit strategy landscape successfully, achieving their financial and professional objectives.

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[1] MicroVenture Marketplace Inc. using data retrieved 6/21/23 from https://spactrack.io/despacs/ & https://www.iposcoop.com/current-year-pricings/.

[2] MicroVenture Marketplace Inc. using data retrieved 6/15/22 from https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf & https://spactrack.io/despacs/.

[3] https://www.mizuhogroup.com/americas/beyond-the-obvious/markets-mindset/the-spac-roller-coaster—is-a-renaissance-coming.html#:~:text=By%20June%2030%2C%202023%20another,been%20returned%20to%20SPAC%20investors

[4] MicroVenture Marketplace Inc. using data retrieved 6/28/23 from https://spactrack.io/despacs/


The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.