Lecture 5: Exits & IPOs Flashcards
What is an exit?
An event that allows institutional investors to monetize the investment into a venture
What are the types of exits?
1) IPO
2) Acquisition (trade sale)
3) Entrepreneurs buyout
4) Liquidation
What is an IPO?
Shares are sold to the public on the stock market.
Usually this is a partial exit, as VC retains some of the stake in the company, receiving both new shares and cash for the old shares.
What is an acquisition (trade sale)?
A corporate buyer (e.g. Google) buys all the shares in the company.
Investors can receive cash and the corporate buyer’s shares in exchange.
What is an entrepreneur buyout?
The entrepreneur buys back the
company from the investors, usually with the use of debt.
This is usually a full exit and investors are compensated in cash.
What is liquidation?
When things go sour investors may decide to break up the company and sell individual assets to various buyers, in exchange of cash.
Most popular exit routes US?
Ranked:
1) IPO
2) Buyout
3) Acquisition
How are exits in Europe characterised?
1) Venture capitalists are better at investing than exiting and do not plan the exit at the time of investment
2) Venture capitalists regard the IPO as the ideal exit (and do not devote enough attention to trade sales)
3) Many exits are by buyback
4) Financial buyers are often not taken seriously
5) Most venture capitalists do not market their investments widely enough and do not make su cient use of intermediaries
6) Management often blocks an exit
What is the main obstacles in European VC?
Frictions in the exit market
What are the stylized fact of Exit Routes?
Venture capitalists prefer the IPO as the exit
Venture capitalist use trade sales to exit both successful and unsuccessful investments
Exiting unsuccessful companies is largely dependent on bankruptcy rules (stigma and cost of failure)
Exit types are similar across financing stages
Later stage investments are more likely to exit via IPO than expansion and early stage ventures
What are the stylized fact about Exit Timing?
Timing to exit depends on the industry of the start-up and the exit route chosen (average 6 years after 1st investment)
Investors are more likely to exit an investment as it moves to the cycle of early stage, expansion and later stage financing
For all types of exit routes the time to exit decreases as the number of rounds increases
Biotech and Internet companies have the fastest IPO exits
As time progresses venture capitalists are more likely to exit via IPO, but if not exited after 2.75-4 years the chance of IPO exit starts to decrease
As time progresses further, exit via acquisition becomes more likely, but if not exited after 6.8-11 years the chance of trade sale starts to decrease
Why to firms go public?
- Access the public equity markets
- Enhance reputation of company
- Attract attention of analysts
- Establish market price/valuation
- Broaden ownership base
- Allow pre-IPO owners to cash out
- Create acquisition currency for future acquisitions
- Debt is becoming too expensive
- Private equity has run out
What are the costs of going public?
General costs: loss of proprietary information to competitors, meeting disclosure rules, loss of decision making control
Direct costs: Hiring an underwriter (7% of IPO proceeds), auditor, legal advisors, printing costs (10% of IPO proceeds)
Indirect costs: Underpricing (firms could have ex post sold their shares at this higher market price and therefore leave money on the table)
What are the pricing mechanism of IPOs?
Fixed price offering: one price is agreed for all interested parties
Auction: the stocks are auctioned to interested parties
Book building: Prepare prospectus, Establish pricing range Roadshow presentations to institutional investors, Underwriter collects information about investor demand
Underwriter sets final offer price that can be within range, Allocation of shares to investors is typically discretionary
What is the formula for underpricing
Underpricing = (P1c / PI) PI
P1c = closing price 1st day of trading
PI = issue price
