Despite a sluggish few years, momentum is building once again for venture-backed
exits—just maybe not in the ways VCs might have traditionally imagined.
In our recent webinar, we sat down with industry experts to discuss record capital availability’s impact on the venture ecosystem, including changes in the exit market.
With a combined 30+ years of experience, Kevin Swan, VP of Corporate Development at Solium, and Buddy Arnheim, Chair of Emerging Companies and VC Practice at Perkins Coie, shared their outlook on exit activity.
The following excerpt has been edited for length and clarity.
PitchBook: In this exit environment, where do you feel like there will be an acceleration of activity?
Kevin: I think there are four areas mainly that I'm seeing some acceleration. The IPO window is wide open, and it's at one of the highest levels we've seen in quite a few years. As long as the markets stay up, I don't see any reason why that would slow down.
The next one we've seen is public companies that are flush with cash and have stocks that are very high and favorable get aggressive with acquisitions. Think of Workday buying Adaptive Insights right before Adaptive Insights' IPO. I think we're going to continue to see those types of moves as cash continues to float.
And then there are two kind of new emerging ones that we're seeing on our radar. The first one is private equity-led exits. We're talking a lot about the growth in dry powder and in the size of these funds in VC, and we see the same trends happening in the private equity world. They're starting to get a lot more aggressive in acquiring companies, whether taking them from public back to private and then having a bit of a roll up strategy around it.
I was just talking to a growth investor the other day who has had five exits so far this year—it's been a very good year for them—and four out of the five were PE-backed firms acquiring the company. That's a bit of a new one for VC, and in the new Venture Monitor report, you can see that trend has been growing over past years.
The last one is the idea of these secondary sales for early investors. The secondary markets continue to heat up. A lot of these nonobvious, nontraditional investors can't get into the primary rounds of a lot of these companies, but they're having some success doing secondary sales with existing shareholders and early investors. And then you've got the high-profile ones like Softbank with a secondary taking most of Benchmark's ownership out in Uber. I think those are going to continue as well.
PitchBook: What does this mean for traditional VC players?
Kevin: For traditional VC players, this has created a lot of interesting exit avenues that maybe previously weren't there. But they're also all a little bit different. PE firms are not going to necessarily be paying the kind of multiples that a strategic player would pay. In the secondary sales, the new investors are generally not going to pay the same price from the last round on a preferred share when they're buying common stock or a share class that's further down the liquidity stack.
Right now, I think most VC firms see a window of opportunity in terms of all these different exit paths. As we know, in this industry, those doors can close very, very quickly, so you need to strike while the iron is hot. I think we're going to see more and more aggression in terms of pursuing exits here in the next while.
PitchBook: Do you think the momentum in technology IPOs will continue or is there still enough burden to dissuade would-be issuers?
Buddy: It is an expensive process to go public, it's an expensive process to be public and the markets continue to demonstrate that they can be brutal. On the one hand, I think the IPO market, the new issue market, has been so dry for so long that we're inevitably facing a backlog of companies that have established themselves. With 100 million plus in revenue and growing 40 percent plus year over year, they're eligible to tap into the market and have enough stability and predictability that they're able to get out there.
What we're seeing right now is both representative of an incredibly long dry spell and a warehouse full of private companies that have established some stability in their business. How long this will last? I don't know. I mean there's an argument to be made that if it does last and if the new issue market continues to be receptive, some of these late-stage funds that we were talking about before may no longer have their opportunity.
Miss the webinar? Watch the recording.
