In the old days of Silicon Valley, there were two possible ways for startups to "exit": (1) an IPO and (2) and acquisition. One used to hear investors ask the question to entrepreneurs: "what is your exit strategy?" Back then, I always thought the question, while it made some sense, was silly and naive.
Why? One couldn't (and still can't) really build a valuable startup in a way that maximized the chances of an IPO vs. an acquisition. All one could, really and truly, do was to build a fast-growing, profitable company that delivered customer happiness. If one did that, one would have a nice exit.
Things are different now. Even without the impact of the recent Facebook IPO, there hasn't been a real IPO market for technology startups for years. [While this is orthogonal to the argument in this post, I believe that we will never have a robust IPO market until a number of deep changes are made in the regulatory structure governing IPO's and in the parts of the financial services industries that facilitate them. I am exceedingly pessimistic that these will occur in my lifetime.]
What that, in reality, means is that almost 100% of the exits by technology startups will, for the forseeable future, occur via an acquisition.
Nevertheless, I still hear the question ("What's your exit strategy?") asked by potential investors of the companies with whom I work in my Sherpa capacity. Although it needs to be asked in a different way, the question makes more sense now for investors, when there is essentially only one path to liquidity, than it did when there were two. It makes more sense because it focuses on making sure that, before investing, there are potential buyers for the Company -- because, for investors nowadays, that's the only way out.
Because the question is still so frequently asked by investors, here's a draft answer that entrepreneurs and their startups might think about using:
Thanks for your question.
At X Tronics, we view our job as building a fast-growing, profitable company that provides kick-ass user benefits. If we can do that, then good things will happen in an exit. Obviously, the IPO route is less probable (for any company) these days, so the (numerically) higher probability outcome for X Tronics is M&A. If we eventually proceed down that path, we think there are a number of possible acquirers for X Tronics, such as _____, ______ and _______. We closely track those companies and stay abreast of their market activities. Through our advisors, we are developing relationships with them that, we think, will serve us well in demonstrating (at some point) how much value we could add to their businesses.
That said, we don’t believe that “build to sell” is a business strategy that creates real shareholder value. We think the only way to build real shareholder value is to focus on creating lots and lots of very happy customers.
So, bottom line, we are aware that an M&A exit is more likely than an IPO, just on the law of averages. There are a number of large companies who would be interested in buying X Tronics if we can create a company with happy customers. We are 100%, heads-down focused on that."