Initial Public Offerings and Sales of Businesses

Ultimately, venture capital firms are looking to make a divestiture of their share of your business within a three to seven year time line. This is not always the steadfast rule, but you need to remember that venture capital firms are in the business of providing their investors with significant returns through their pooled capital funds. When looking for venture capital is imperative to discuss the exit strategy wanted by a potential VC firm.

Many people feel that all venture capital firms are seeking to grow your business with the intent of having an initial public offering (or “IPO”). However, this is not often the case. Many venture capital firms, after a three to five year period, will seek to divest the profitable business to a larger firm that is seeking to consolidate or remove a competitor. With the recent economic downturn, the demand for new initial public offerings has waned among individual and institutional investors. As such, many venture capital firms have begun to act like their private equity counterparts by focusing on selling the business to a third party.

However, taking a company public often provides a much higher return on investment than selling the business to a third party. Additionally, publicly traded firms have a certain prestige attached to their name once this process is complete. Finally, and IPO produces additional visibility for your brand name as more people (mostly individual investors) become aware of your business. The drawbacks of engaging an initial public offering is that despite the higher return on investment, the senior officers are typically required to stay on for at least one to three years after the IPO is complete. While this is not a law, most investors will not purchase IPO shares if they know that the person that runs the business intends to leave very quickly. Much like venture capital firms, individual investors are looking for strong growth from your company.

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