Most venture capital exits are acquisitions, not IPOs. I’m guessing that about 80% of exits are acquisitions.
But VCs generally say they are not interested in building companies to be acquired. They want to build profitable standalone companies that could IPO.
But if there is an 80% chance that your company is going to be acquired, why build it to be a great standalone business? Why not build the company to be acquired and make the appropriate trade-offs that make you an acquisition target?
Because great standalone businesses drive the returns of venture funds. Whether the standalone business is acquired or actually IPOs.
If great standalone businesses give the 100x returns that “make” a venture fund, why would you invest in anything else?
Ebay gave two major reasons for buying Skype in their pitch. First, they think there a bunch of synergies. And second, Skype is “a great standalone business.”
Please send me your thoughts on this half-bakery.
Nivi, once again a most insightful point. Well done, and I do think it’s a great question for entrepreneurs- are we building for an acquisition or an IPO?
Since, I am the first to comment, I’ll just say that we are building for acquisition. For us, before doing a venture it’s important to go and talk with the people who are likely to acquire us. I just see this as a straight forward, risk averse way to go about entrepreneurship.
I’d love to hear from somebody who is doing ventures with an eye to the stock market.
Spot on!
Also: a standalone business has more options (it can IPO, sell to ‘anyone’, continue to operate…) which makes it more valuable and easier to negotiate a good (for the company) deal.
A business that is set up to be a trade sale often effectively has a deadline for the sale, and obviously a limited number of potential buyers.
In terms of building your company solely to get acquired, you have to anticipate the needs of the buyers many yrs down the road… can you guess Google’s or Yahoo’s acquisition strategy in 3 – 5 years? Maybe, but probably not. As the previous writers said, a good standalone business has a higher likelihood of getting sold than a strategic bolt-on that has junky innards or products created solely to compliment those of potential buyers… unless the business possesses the rare “must-have” tech that potential buyers must acquire for mostly defensive reasons (but also offensive). Entrepreneurs, especially in the internet world, have better shots of LT success thinking up good standalone businesses that are a little outside the box than thinking up the next “must-have” product for a handful of buyers many years down the road. Just my opinions though…
Nivi,
Good post. Prior to starting our firm, we spent a considerable amount of time analyzing the economics of acquisition (specifically, early-acquisition)… because there is a difference. Early acquisitions are purely strategic and occur before significant financial resources are committed towards building route-to-market infrastructure. Getting venture-type returns when investing in companies that are targeting strategic sale via early-acquisition requires a specific investment discipline that when executed successfully, can yield a superior IRR – which is how funds are measured anyway.
We discuss this in considerable detail on your blog: http://www.vpfund.com