Lecture 10 Flashcards
How to recover capital from investments?
- Acquisition
- Being swallowed up by another entity - Merger
- Merging two companies (maybe both struggled to capitalize, or there is some strategic benefit of coming together) - IPO
- Listing on a public exchange, usually the NASDAQ for tech companies - SPAC
- Alternative route to IPO for smaller companies - Secondary
- Secondary transactions are transactions between shareholders of a company
- No cash from the company’s balance sheet is involved
- It usually involves founders or employees taking some cash off the table or early investors / angels exiting all or part of their positions
- This usually happens when there is high demand for investment in the company
(the round is oversubscribed with interest) - Liquidation / Wind-Down
- The company must liquidate its assets in order of liquidation preference of its creditors
- Usually results in no return for investors
- Hopefully, the investor has taken a “write-down” on their own books prior to this happening so that it is not a surprise to their LPs
How has time to exit shifted over the last 20 years?
In dot com era companies were IPO’ing after 3 years
Over the last 20 years it has more than doubled in time length
Now there is more funding sources and lots of capital in the market
Before the only way to increase and get capital was to IPO
In 2021 a bunch of companies IPO
Because companies anticipated market plunge and took the opportunity prior to the bear market
Pros and Cons of choosing to stay private?
Benefits?
○ Less stringent reporting
○ Less attention
○ More private data
Costs?
○ Can’t access public pools of capital
○ Employees / investors cannot monetize their shares
Explain why this statement holds true: “IPOs are the highest value exits but also the rarest”
IPOs take the longest to develop due to the size requirements prior to filing for IPO
○ Acquisitions and other exit
options can happen along the
journey so are quicker in their
timeframe
When IPOs due occur, they usually provide the most return to investors since those are select few companies that made it along the entire journey
Most venture portfolios only have a few IPOs
○ Some VCs have an OKR of producing 1 IPO per calendar year
IPOs are the highest value exits but also the rarest
Why are IPO’s reliant on market cycles?
IPOs tend to come in waves as company’s have the luxury of waiting for the right market momentum prior to filing
Companies rarely file for IPOs out of desperation, so they have the ability to ‘time the public markets’
We saw tons of IPOs in 2021 with many capitalizing on the strong valuations and many also anticipated a market correction coming in subsequent years
General exit activity is also impacted by market cycles, not just IPOs
○ As large companies tighten up their balance sheets,
acquisitions are less likely
○ As demand for fundraising loosens, secondaries are less
prevalent
Why are IPOs intentionally underpriced?
IPO has a first day pop which benefits the investment bank but doesn’t have a long-term return
Customers of investment bank have a guaranteed return
Convince start-up that it’s a good idea because it will have good market signal
Bank has created this culture saying that “everyone wants the pop”
What is direct listing
Anyone can participate
The company runs their own roadshow
Does its own adventure to set its IPO
Spotify was the first one to do it
It took 2 years to get through all the loop holes and steps
It can now be done in the same time period as an IPO
Why have SPACs underperformed?
The SPAC route ended up attractive lower tier companies as a result of the unique structure and uncertainty on how
the market would view them
○ More traditional companies stayed the course and went public via traditional IPO in 2021
○ SPAC’s attracted companies in many cases that were not
meant to be public yet, and the market has responded accordingly by massively correcting their prices
