Tech Initial Public Offerings (IPOs) have a way of grabbing the public’s attention. In 2018 alone, Shopify, DocuSign, and Dropbox all made headlines by going public and are now trading at healthy valuations.
But many tech companies have quietly been choosing a different route this year, foregoing the high-profile IPO in favor of selling ownership in their company (acquisition). From the GeekWire 200, an index of the most prominent Pacific Northwest tech startups, six companies have been acquired in the first half of 2018 alone. As tech behemoths like Apple and Google carry more cash on their balance sheets than ever before, acquisition is a possibility for an increasing number of tech startups. We’ve identified 5 factors that are leading these emerging tech companies to choose acquisition over IPO.
- Synergies: Powerful tech acquirers have massive customer bases, valuable relationships, and resources that would be difficult, if not impossible, for a startup to build from the ground up. For a tech company trying to take its growth to the next level, these resources are an invaluable asset.
- Long vs. Short Term: Once a company goes public, every move is scrutinized. Just look at the headlines surrounding the Snap IPO in 2017 – public markets are often more concerned with short term growth and profitability and have no patience for the long term. An acquiring company has an interest in the long-term growth and well-being of the startup.
- Timing: Preparing for an IPO is no small task. To get financials in order, register with the SEC, and rework the internal framework of the company so it can operate publicly takes at least one to two years of intensive planning1. Tech startups growing quickly don’t have time to get ready for an IPO, but the acquisition process can be streamlined to take only a matter of months.
- IPO Costs: Going public is an expensive endeavor; direct, one-time costs of going public for a tech company in the $100-$250 million revenue range are an average of $4.3 million, even excluding the substantial underwriting fee of 4-7% of gross proceeds1. For a company in the growth stage looking to raise capital, expenditures like this on the IPO process just don’t make sense.
- Ongoing Costs: After an IPO, a company that’s gone public is still left with a variety of recurring costs – financial reporting, legal and compliance, and auditing fees that can add up to $1-$2 million a year, not to mention the staffing costs of maintaining a new corporate structure1.
It seems that many founders of growing tech startups aren’t dreaming of the next hot IPO, opting instead for strategic acquisitions that offer an infusion of capital and resources without the costs and pressures of going public. As this trend continues, the rest of 2018 is shaping up to stay busy with tech M&A.
At Meridian Capital, we work with a broad range of tech companies to find them the best possible valuation through our extensive network of potential investors. Our team includes industry thought leaders who add value and insight to the M&A process and stand by our clients every step of the way.