10.20.05
Exit strategy for technology companies
I was part of a panel in a NYC event this week. One of the interesting discussion topics is on the exit strategy for technology companies between M&A and IPO. Overall, the general ratio is 20:1, highly tilted towards M&A. Even though IPO has always been a symbol of success for many entrepreneurs, the chance for a startup to go IPO with a bang is definitely harder than a few years ago due to higher revenue requirement and SOX compliance. Take SOX for example, SOX will cost a company somewhere between $1.5M - $2M per year. If a company has a net margin of 15%, that would translate to $10M - $13M per year in additional revenue to support just the basic compliance service. This does not even take additional board/governance/insurance cost and risk into consideration. With rapid consolidation in technology space such as Oracle’s acquisition of Peoplesoft and Siebel, and waves of private equity rollup in technology companies, the IPO breakout for a startup is much harder now.
This raises an interesting question on what makes sense to position a startup. If a company is structured for M&A exit, then it should be positioned correctly up front, be really careful with venture funding intake, stay narrowly on product/service focus and excel, and try to establish a defensible position through patents and customer base. Another approach is to stake in an international market, try to be a leader and then get acquired by US leaders with a premium.
