Why focusing on a startup’s ‘exit strategy’ stifles innovation
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.
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.
- INSIGHTEC, an Israel-based company focused on incisionless brain surgery, raised $150 million in Series F funding. Koch Disruptive Technologies led the round.
- Lightbend, a San Francisco-based developer of a reactive application development platform, raised $25 million in funding. Dell Technologies Capital led the round, and was joined by investors including Bain Capital Ventures, Blue Cloud Ventures, Greylock Partners, IBM, Intel, Juniper Networks, and Shasta Ventures.
- Hungry, an Arlington, Va-based catering marketplace that connects businesses with independent chefs, raised $20 million in Series B funding at a valuation of more than $100 million (pre-money). Evolution VC Partners led the round.
- Goodlord, a London ‘proptech’ startup that offers cloud-based software to help estate agents, landlords and tenants manage the rental process, raised £10 million ($13 million) in Series B funding. Finch Capital and Latitude Ventures led the round, and were joined by investors including Oxx Capital.
- Touchland, a personal use hand sanitizer brand, raised $1.75 million in funding. Ben Bryce of Align Ventures and Spring St. Group led the round.
PRIVATE EQUITY DEALS
- Firmenich, Ardian, and Tikehau Capital agreed to acquire Les Dérivés Résiniques et Terpéniques, a France-based developer of plant-based chemistry. Financial terms weren't disclosed.
- Bessemer Investors acquired Leonard Valve Company, a provider of water temperature control valves and monitoring services. Financial terms weren't disclosed.
- Madison Dearborn Partners and CoVant Management agreed to acquire AEVEX Aerospace, an Arlington, Va.-based provider of full-spectrum, mission-critical airborne intelligence, surveillance, and reconnaissance technology solutions. Financial terms weren't disclosed.
- ClearCourse, which is backed by Aquiline Capital Partners, acquired Felinesoft, a Bristol-based digital solutions provider. Financial terms weren't disclosed.
- Susquehanna Growth Equity made a significant minority investment in Clutch Co, a Washington D.C.-based B2B ratings and reviews platform for IT, marketing, and business service providers. Financial terms weren't disclosed.
- Altus Capital Partners sold GED Integrated Solutions, a supplier of fully-integrated insulating glass. Financial terms of the transaction were not disclosed.
- Accenture (NYSE: ACN) acquired Context Information Security, a U.K.-based cyber defense consultancy. Financial terms weren't disclosed.
- Albertsons Companies, a Boise, Id.-based grocery chain, filed for an $100 million IPO. It posted $60.5 billion in revenue and income of $131 million in 2018. Cerebus (44.3% pre-offering) and Bessemer (14.9%) backs the firm. It plans to list on the NYSE as “ACI.” Read more.
- Zentalis Pharmaceuticals, a New York-based biotech developing therapies for cancers, filed for an $100 million IPO. Recurium Equity, Matrix Capital Management, and Viking Global back the firm. It plans to list on the Nasdaq as “ZNTL.” Read more.
- Lyra Therapeutics, a Watertown, Mass.-based biotech developing drug and delivery solutions for ear, nose, and throat diseases, filed on Friday for an $58 million IPO. It has yet to post a revenue and posted losses of $16.3 million in 2019. Perceptive Advisors (32.4% pre-offering) and North Bridge Venture Partners (17.3%) back the firm. It plans to list on the Nasdaq as “LYRA.” Read more.
- Ayala Pharmaceuticals, a Rehovot, Israel-based biotech focused on small molecule therapeutics for rare and aggressive cancers, filed for a $50 million in an initial public offering. It has yet to post a revenue and posted losses of $8.8 million in 2018. Israel Biotech Fund (35% pre-offering), aMoon (25%), and Harel Insurance Company (18.5%) back the firm. It plans to list on the Nasdaq as “AYLA.” Read more.
FIRMS + FUNDS
- Arkin Holdings, an Israel-based life sciences investment firm, raised $140 million for its fund, Arkin Bio-Ventures II.
- Frontline Ventures, a Dublin and London -based venture capital firm, raised $80 million for its new fund, Frontline X. Financial terms weren't disclosed.
- Portag3 Ventures named Chris O’Neill as a partner.
- Neil Tolaney joined TCV as a general partner.