Median U.S. Exit Values Slip in 2020

Innosphere Ventures works at the Intersection of Technology Startups, Venture Capital, and Technology-Based Economic Development.

PitchBook reported in January that overall M&A transactions in the U.S. were less than $2B for the second year in a row. Not surprising given the 2020 pandemic. Creating an exit pathway for your technology startup venture is a core responsibility of the management team and board of directors. Understanding M&A trends and having the data to create this exit pathway is essential.

In the Innosphere Ventures' new client onboarding program, we cover exit strategy for founding teams. We think there are three different types of businesses an entrepreneur/founder may build: an HQ business that may not have an exit pathway; a venture-backed business that is generally seeking an oversized exit event; and an early exit business (popularized by Basil Peters, author of Early Exits).

One of the surprising data points we share with new companies at Innosphere is that the median technology company exit through a corporate acquisition event in the U.S. is less than $40M. Innosphere regularly meet founders and CEOs of technology startups that off by orders of magnitude on exit valuations.

Planning for a prospective exit is an area we think startups need to pay more attention to. Starting at the top, it is important to know that the vast majority of exists (70%), from a statistical perspective, is below $100M. See the graphic below.

In thinking of how a technology business may exit, it is important to understand the different ways that technology businesses can exit, such as M&A Acquisition or Buy-out. Below is data on exit pathways as published by PitchBook.

In working not the exit model, I frequently see unrealistic exit valuations. I like to say an oversized exit solves all issues in our models. Innosphere's recommendation is to work diligently within the founding team to clarify the groups' exit objectives. For instance, one founder may seek to build an HQ business with long-term cash generation, this will conflict with a second founder seeking a corporate M&A exit in years 4-5 of the startup. Second, we recommended building the initial exit model with realistic comparables and real data on exit valuation. Creating an exit model assuming a $50M exit valuation versus a $200M exit valuation produces massive differences in assumptions around founder and early investor returns. The exit is one of many topics that Innosphere covers in its new client onboarding program. To learn more about Innosphere Ventures' support for startup businesses, see www.innosphereventures.org.

Mike is the CEO and General Partner of Innosphere Ventures. We look forward to working with your technology startup business.