Week 5 - Exits and IPOs

Question 1

Exit Definition

Answer 1

An event that allows institutional investors to monetize their investment in a venture

Question 2

Types of Exits

Answer 2

• IPO: shares are sold to public on stock market - usually partial exit as VC retains some stake
• Acquisition: a corporate buyer buys all shares in company
• Entrepreneur’s Buyout: entrepreneur buys back the company from the investors, usually with use of debt - full exit
• Liquidation: investors break up company and sell individual assets to various buyers

Question 3

Exits in US vs EU

Answer 3

US: mostly IPOs
EU: frictions exist

Question 4

Decisions in an Exit Strategy

Answer 4

1. Exit route
2. Timing of the exit - depends on industry, on average 6 years

Typically VCs have opportunity to exit at each round of staged financing

VCs tend to prefer IPO exits - later stage investments more likely to do so
Then they prefer acquisition

Question 5

Why do firms go public?

Answer 5

• Access to 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

Question 6

What are the costs of going public?

Answer 6

Direct costs:
- Hiring an underwriter (7% of IPO proceeds), auditor, legal advisors, printing costs (10% of IPO proceeds)

Indirect costs:

• First day market price exceeds offer price by an average of 10-15%
• Firms could have ex post sold their shares at their higher market price and therefore “leave money on the table” (underpricing)

Question 7

Underpricing

Answer 7

Common to see the stock price going strongly up the day after the IPO - important to correctly value company

Question 8

Pricing Mechanisms

Answer 8

• Fixed price offerings: 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, underwrite collects information about demand and sets price, allocation of shares to investors