Exit of a tech startup
Most startup investors expect that they will be able to sell their shares within 5-10 years. This is called an “exit”. There are three typical exit cases: A trade sale, an IPO or a sale to a PE company.
IPO - the founders' dream
Listing a startup at a stock exchange such as Nasdaq is the dream of many founders. This typically becomes an option once a company has reached a valuation of a few hundred million USD. Having said this, a number of stock exchanges have created structures that let startups IPO already at much lower valuations.
Note that while an IPO is an exit for investors, the founders / executive management are expected to play a key role going forward.
Further information about IPOs – incl. latest trends – can be found here.
Trade sale - the most common case
This is the most frequent case – selling the startup to a larger company, a so-called “strategic acquirer”.
The operative team and key persons are usually expected to stay in the company (and are often getting paid nicely to sign a long-term contract). Founders and investors get paid for the shares they own; typically there is an upfront fee and a milestone-based pay-out over time.
Sale to a PE company
This is a subcategory of a trade sale – selling the company to a Private Equity company rather than another company. Once a company generates substantial revenues (USD 20m+) and generates attractive margins there are many funds around the world who will be interested talking to you. As in the case of the IPO, they will want to keep key persons in the company.
A typical real life example
A SaaS company has a collaboration with a large tech company. The cooperation works well, and after some time a manager of the tech company asks the CEO of the startup whether she is interested in selling the company.
This triggers excitement, anxiety and lots of discussion at the startup’s executive team and board. They decide to trigger a bigger M&A process with an investment bank – and after six months sell the company for 10x revenues.
What should you answer if an early stage investor asks you about your exit strategy?
While it is important to understand the different exit options, the best answer is usually something like this: “It could be both a trade sale or an IPO. Having said this, we don’t worry too much about this at the moment, and fully focus on scaling our company massively over the coming years. With this there will be attractive exit options.”
Should you discuss exit with your co-founders?
Yes! While you should not spend too much time on it, it is important to have a joint view on where you want to go with your company. Aiming for a USD 20m trade sale in three years has very different implications than building a Nasdaq-quoted global leader with 1bn revenue – both in terms of the team you want to build as well as the investors you want to have on board.