Money Out – Exits in Q2 ’19: M&A, IPO, Secondary Sale

Running a business is always risky, investing into an early stage business means buying into that risk in exchange for the perspective of a future reward from the value built on the investment. In most cases this reward can only be concretised by an exit.

Whether it’s a merger or an acquisition, or even a public stock listing, an exit allows shareholders to realise the value they created with their investment and even make a return.

The second quarter of 2019 showed clear signs of an eventful year on this side, as Q1 had already anticipated with Lyft’s IPO valued over $24m. With giants like Uber and tech phenomena like Slack and Zoom hitting the public market with mixed outcomes, a stagnant M&A activity and, Q2 seems to raise more questions than it answers.

VC-Backed M&A

Crunchbase data signals some strength in venture-backed M&A activity. Now, obviously, there were more than 357 M&A transactions in Q2, but the universe of companies with known venture backing which were privately-held at the time of the M&A transaction is relatively small. However, from this limited subset of deals we can see some trends.

M&A deal volume is relatively flat, both on a QoQ and YoY basis. For any other metric in this report, deal volume doldrums like these would disappoint. (Dollar volume matters less as a metric because just a few really big deals can skew these numbers significantly.)

In prior reports we’ve highlighted declines in M&A deal volume as a problem facing startups and their investors alike. It was particularly problematic when the IPO market was a lot slower, but now that that side of the liquidity equation has opened back up, investors and their portfolio company teams can find upside even in a sideways M&A market.

Initial Public Offerings

Echoing what had already been an eventful Q1 in terms of public offering, the second quarter of 2019 brought some big names to the public markets in a highly anticipated IPO marathon featuring the likes of Uber, Pinterest, Slack and Zoom – to name a few. These public offerings had mixed outcomes, with some disappointments, but far more encouraging than the start of this year.

A handful of underdogs like Zoom, Beyond Meat and Crowdstrike, which had received very little PR compared to other big names on this list smashed through investors’ expectations by multiplying their value within a few weeks on the public markets. Beyond Meat more than any other achieved a 7-fold increase in its share price in just over two months, topping a $10bn market cap.

Others definitely underdelivered on the hype: Uber stock took quite a sharp dip just days after its IPO, and the company is still recovering. Nothing quite as tragic as Lyft, but even companies like Slack and Pinterest did not manage to reach the kind of growth that a growing tech company would hope for after an IPO.

Bonus: Secondary Transactions

An additional way of freeing up funds that are locked in a private company is known as a secondary transaction. Although quite uncommon and almost never publicly disclosed, a secondary transaction takes place when one shareholder sells their stake in a private company to a third party.

While the scarcity of public data would make it virtually impossible to produce a detailed report of how the phenomenon impacts companies’ growth and valuations, last quarter presented an exceptional event that made it possible to dedicate more attention to this kind of transaction.

As reported by Crunchbase News, Reuters, and MarketWatch among others, TransferWise shareholders including “hundreds” of employees and some of its prior investors sold $292m worth of shares. The deal allowed existing shareholders to gain liquidity and free up locked assets, while helping the company clean up its cap table, presumably assigning the shares to their later stage investors.

Some media outlets interpreted the move as pre-IPO tidy-up, but the company CEO denied the claims, saying that TransferWise isn’t looking to go public anytime soon. On the other hand, a secondary sale and an IPO can fulfil the same needs, like early shareholders’ need for liquidity and the company’s need for validation from external buyers.

The Bottom Line

In an ecosystem where overfunding is a very real issue, it is increasingly important to monitor exits to make sure that investors and Founders are still able to make the expected returns so that the current level level of investment stays sustainable.

Although the start of this year has been quite disappointing, especially looking at the public market, it seems like 2019 won’t burst the startup bubble just yet. Looking at the IPOs that took place in Q2, it seems like the most underrated companies are the ones delivering the best results in the public markets. This should inspire us to look beyond all the hype and PR sponsored by the tech giants themselves, and dig deeper into what makes a company great: Zoom has been profitably growing for many years now, same as TransferWise which chose an unusual path to liquidity; Beyond Meat is finding public consensus from people buying into their vision of revolutionising meat consumption; Slack listed their shares directly, bypassing banks and financial intermediaries.

The ongoing trend seems to be that companies which are able to create value “their own way” consistently outperform those that still adhere to the mainstream paradigm to accumulate billions in funding and inflate their valuation, just to face the hard truth as the public markets tell it.