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Why focusing on a startup’s ‘exit strategy’ stifles innovation

March 9, 2020, 1:48 PM UTC

What’s your exit strategy?

That’s a common question posed to entrepreneurs who helm venture-backed startups. Will you sell? Will you IPO? The so-called “exit strategy” serves as a way to explain how the company’s investors can ultimately cash out and generate a return.

In a new op-ed, Stanford Law School professor Mark A. Lemley and Stanford Law student Andrew McCreary argue that the focus on the “exit event” — particularly exit by acquisition — is preventing disruptive competition, cementing tech monopolies, driving companies to shelve innovations, and undermining the promise of Silicon Valley.

As Lemley writes, “Silicon Valley changed the world. And it did so because founders and venture capitalists wanted to win tomorrow’s markets, not sell out to those who had already won yesterday’s.”

According to their research, more than nine in 10 “exiting” venture-backed companies sell out to other firms. Rather than promote competition and innovation, venture capital just further “cements incumbency.”

From Lemley and McCreary’s op-ed:

Antitrust agencies should be much more skeptical of incumbents buying startups. We should presumptively ban incumbent monopolists from acquiring competitive startups, something the Clayton Act already gives regulators the power to do. But we should also worry about companies buying startups that don’t directly compete but that offer a possible platform for making the existing market obsolete. So antitrust agencies should also aggressively investigate mergers in complementary industries, like Facebook’s acquisition of WhatsApp or Google’s purchase of DoubleClick, even if the companies aren’t yet direct competitors at the time of the purchase.

It’s interesting to consider as the industry continues to talk about what to do with its entrenched tech monopolies. And we’ve seen some massive acquisitions lately — Visa’s $5.3 billion purchase of Plaid, PayPal’s acquisition of Honey for $4 billion, and Intuit’s acquisition of Credit Karma for a monster $7.1 billion

But if the volatility in the public markets continues, don’t be surprised to see even more companies foregoing IPOs in favor of M&A. 

Read the full op-ed here.

VALUATION DISCOUNT: WeWork first led a $32 million funding round for women’s workspace startup The Wing in 2017 and its 2018 funding round resulted in a 21% ownership stake in the company. At the time, the company was valued at approximately $365 million.

In January, WeWork sold its stake in The Wing to a group of investors including GV (formerly Google Ventures) and CAA Ventures as part of its plan to divest from non-core businesses. According to a new report in Bloomberg, the sale implied a valuation for The Wing of about $165 million, a notable decrease in value. Investors also put in an additional $15 million of funding “in the form of a convertible note slated to convert at a roughly $365 million valuation when the company raises future capital,” the story notes.

Read more here.

Polina Marinova
Twitter: @polina_marinova


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