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Although it seems to be out of the equation at the time of launching a startup, how to recover the investment made in it is always present in the mind of any entrepreneur. Maybe he tries to make his company last forever and is likely to show some emotional attachment to the firm that he has built up himself; but no entrepreneur should forget, or if he does investors will remind him, the method by which to recover the investment in a startup.
Naturally, entrepreneurs and investors expect to get something for the time and money spent on building up a company. Of course they have the potential profits that the company may manage to report someday, but, apart from that scenario, there are several strategies to recoup the investment that must be taken into account.
Some options will present themselves, but sometimes it is better to have a clear strategy to achieve them. Whether in one case or other opportunities don't always arise and when they appear, it's best not to let them slip away. So it's good to be aware of the main methods technology companies have to recoup their investment and also understand how each phase of their life is better or worse for one or the other.
Sale: most common option
The classic choice par excellence: sale. The acquisition of a startup by a larger company is usually also well regarded by both entrepreneurs and investors. After all it is the fastest, easiest and most direct way to recoup the investment in the company. Being acquired by another company is probably the simplest and most common “exit” of all, and it is something that is plentiful in the technology sector.
The advantages of selling as a method to recoup investment are already evident. Through a purchase transaction led by another larger company, founders and investors in the startup collect the piece of the pie that they have helped develop without the need, in principle, for additional efforts. Selling also makes it possible to exit completely from the company, the life of which will continue in the arms of the acquiring company. This is all without the entrepreneur having to necessarily rule out the option of keeping working on it.
Although, despite its apparent simplicity, it's not enough to wait for someone to knock on the door and collect the money offered. Entrepreneurs and investors should study the situation of the startup and its future options well, as it would not be the first time someone sells before time or to the wrong buyer. The main dilemmas here are timing and the valuation of the company; i.e. when is the right time to sell and at what price. The expectation of receiving returns without waiting another second may blur the vision of more than one and selling may be anything but the promised end.
Merger: an additional opportunity
One of the less direct ways to recoup the investment in a startup is through its merger or consolidation with another company. It's not a very common method, since ideal occasions for them rarely occur: coinciding with similar companies that are both at the appropriate phase and there are also the necessary conditions to bring the process to fruition. Too many variables for the opportunity to arise.
Nevertheless, if the right company is found, mergers are one of the best exits for entrepreneurs and investors, especially if the other company is a similar size. In such situations it is likely that it does not have enough money to buy the other outright, so the concentration of efforts in one company becomes a desirable option. Mergers make it possible to quickly and significantly increase the value of a startup. Moreover, the appropriate union makes it easy for participation in the combined company to be worth more than it would if it continued on its own.
The main disadvantage, besides the difficulty of the appropriate opportunity arising, is that it doesn't provide an immediate exit. It is usual for the founders and their team to continue to participate, in one way or another, in managing the new company. Although it was not a problem for them, it's probably not the preferred route for many investors. It should be taken into account that mergers do not usually provide direct returns to all those involved in the startup, but it is often offset with a shareholding in the new combined company, the future success of which is yet to be demonstrated.
IPO: reserved for older companies
IPO is probably the ultimate dream of founders and investors of more than one technology startup. It's the golden end, there are few more appropriate ways to complete building up a company than starting to trade on a stock exchange. The problem is that it seems an operation that is something massive for the vast majority of startups.
Selling stocks in a company on the stock exchange is a good way to raise cash for entrepreneurs and investors, while making it possible to keep some control over the company and its future. It becomes the obvious move when it comes to companies of a certain size that are already profitable in themselves. The latter is important, and after all it is difficult to get someone to buy stocks in a company that has not even generated revenues.
The problem: the difficulty in getting there. Merely preparing the company for IPO costs literally hundreds of thousands of dollars. With such high figures, it only seems to make sense at a certain scale. Furthermore, the ability to maintain the control and independence of the company is all relative. From the time that it becomes listed on a public stock market, the company's management is accountable to its shareholders and the company's figures must be published regularly for public scrutiny.
Other less common alternatives
The options do not end with the above. There are alternatives that are lesser known but may be considered at a given time. The first one entails selling the company to another that is responsible for managing it from then on. The option of a company transfer to a third party may be carried out through the acquisition of the entire company or a share in it, so that other owners and investors can decide for themselves if they want to stay or leave the company at the time.
Another option is liquidizing the company's assets. More stipulated as the limit measure, sometimes it can become the best method to recoup the investment in building up a company. The problem is that it's not always easy to find a buyer, and although obtaining returns from selling goods can satisfy more than one concerned investor, it probably reports a small amount of money to stakeholders.
Lessons from giants
With the increase in the creation of startups and continuous changes in the technology market, in recent decades selling companies seems to have completely superseded other methods as a form of recovering investment. Even among the largest companies created during the last 10 years buying and selling operations are more common and the IPO is reserved for those with a longer-term outlook.
To check the above and delve a little deeper into the different methods mentioned above, just take a look at the group of companies that have reached the greatest value in the technology sector in the last decade. For that purpose the list compiled by Aileen Lee for TechCrunch, which has been subsequently improved, may be of use that includes the 37 companies founded after 2003 that have reached a value of over one billion dollars.
Even as special cases, since they hardly represent about 0.7% of technology startups launched in the past 10 years, reviewing their figures is an interesting exercise. As well as verifying how, among them, selling the company is the most repeated option, while the IPO is increasingly reserved for some players. The average investment in these companies is about $348 million and their value ended up exceeding that figure by over 11 times. The highest return corresponds to companies that ended up trading on the stock market, with Facebook leading the list with a value of more than $100 billion. The Social Network took 8 years to go public, which is one more than the average time between the foundation and the time of sale or IPO of the rest.
In those years many things can change for any startup and what is good for one may be harmful to another. Whether selling as soon as an offer appears, merging if possible, or holding out until an eventual IPO; the method chosen to recoup investment will be tested in each case.
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