IPO or Acquisition: Rational Rationale in Turbulent Times

IPO or Acquisition: Rational Rationale in Turbulent Times

You’ve seen it in the news and across every social media platform — we’re facing an economic downturn. While experts can’t seem to agree if there’s an impending recession or if we’re already experiencing the onset of one, one thing is undeniable: The current economic climate is turbulent.

Experts like Jeff Epstein, Operating Partner at Bessemer Ventures and former CFO of Oracle, has navigated economic crises before and come out successful on the other side.

In the most recent episode of Outcome By Design, Paul Weinstein is joined by Jeff Epstein to discuss the importance of building strategic relationships, tracking key indicators of success, and evaluating the probability of an IPO versus an acquisition. With Jeff's deep experience and level-headed approach, he offers valuable insights that are essential for navigating today's challenging fundraising environment. 

Join us as we discuss: 

  • Putting CEOs' focus in the right place (to include exit strategy discussion)
  • Managing investor expectations through focus shifts
  • Developing a growth framework during economic downturn
  • Shaping successful conversations around likely outcomes

Finding a focal point for CEOs

In a perfect world, startups are centered around growth — a cycle of raising money and growing eventually leads to an IPO and the business achieves the highest level of success with exponential growth. But that perfect picture isn’t the only option.

In fact, 98% of successful startups, meaning those that perform well enough to return money to their investors, end up acquired.

While being part of that 2% that reach an IPO is the dream, it begs the question: Should CEOs be focused on growth alone or on building the relationships that will ultimately lead to a favorable sale?

With extensive experience as both CEO and acquirer, Jeff offers valuable advice to current CEOs readying to navigate the current turbulent economic climate.

“CEOs should spend 95% of their time building the business and 5% of their time building relationships with companies that may acquire the business,” he says.

Building the business should remain a priority, even if you intend to sell.

When a business is acquired, it’s because it’s become known, gained attention, or proven its value. No acquisition occurs simply because of networking and relationships — though they play a vital role — so a healthy focus must be on business growth and success. 

During his time at Oracle, the business ran on a market-map system that outlined each product Oracle didn’t have but wanted to eventually acquire or develop. If a startup developed in one of the fields Oracle outlined, they wanted to meet. But to even garner the attention of an acquiring company, you have to establish yourself as a viable player. 

“If we don't know who you are, you have to persuade us you can get on that chart — and persuasion takes time,” Jeff says. “You have to talk to the Mergers and Acquisitions team, the software team, and the product team. We have to talk to customers and determine customer benefit and product line.”

If you’re not already on the radar of companies who might purchase, acquisitions can take months — or even years — and ultimately, many fall through. Building relationships while focusing heavily on business development will help bypass many of these formalities.

Managing investor expectations through a focus shift

When the going gets tough, you’re often faced with a decision: cut back, save money, and push through or keep pushing for growth. Which is right for you? 

According to Jeff, the right path for your business is likely different from others. Regardless of which you choose, it can be difficult to gain alignment with investors and employees.

“The metrics investors based their investments on a year or two ago have completely changed — those numbers are irrelevant,” Jeff says. “Meet with your investors privately and show them today’s metrics. Ask them what revenue profitability, revenue growth rate, cap payback, and debt renewal rate you have to achieve for them to be interested in any valuation a year from now.”

When working with investors, honesty is the best policy. Communicate clearly, directly, and in private to receive the best odds for continued support and understanding.

Developing a growth framework during an economic downturn

Choosing the wrong growth framework during an economic downturn can spell disaster for your startup. Invest too much in growth and development? Peter out and exhaust your funds, ultimately closing your doors for good. Invest too little in growth? Maybe break even, potentially losing the support of investors and employees as costs are cut.

While many entrepreneurs and CEOs have the urge to jump in and risk it all, Jeff places more value on the ability to assess each situation and adjust to save the business in the long run.

“Even if you're growing slower and you're worth less over a few years, once you break even you can start making, raising, and investing more money,” Jeff says. “You can continue growing — and maybe you've lost a year or two worth of growth, but it's a temporary loss.”

But even during an economic downturn, relationships are vital to securing the future success of your business.

There are three possible outcomes for successful startups:

  1. The company remains independent and becomes profitable privately.
  2. The company goes public.
  3. The company is acquired.

Navigating turbulent economic times now will require an honest assessment of where your business stands today. Then, you can begin to build a framework that fits your goals, abilities, and likely outcomes.

“If you think the IPO is less likely, it makes sense to spend a small amount of time building relationships strategically,” Jeff says. “If you're more likely to be bought by private equity, focus on relationships with key private equity firms that focus on technology.”

Relationships are essential at all times. But when the economy is shaky and uncertain, there is no better time to start building relationships than now.

Want to learn more details about how Jeff was so successful? Listen to the full episode of Outcome By Design to learn more.

Paul V. Weinstein Headshot

Paul V. Weinstein

Paul is a Silicon Valley-based investment banker and advisor to technology, entertainment, and media companies worldwide. He has been an entrepreneur, investor and advisor to dozens of start-ups, raised hundreds of millions of dollars in capital and been a key player in acquisitions with a total value in the billions. More at http://paulvweinstein.com.

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