Startups Turn To PE Firms For Exits

Ajay Chopra, who founded Pinnacle Systems, a digital video hardware and software company for consumer and broadcast markets, wrote a column in TechCrunch about the viability of a private equity buyout for a startup. The option, the current venture capitalist said, is one worth seriously considering.

“About 13 years ago I faced an excruciating decision: whether to sell my company, Pinnacle Systems, to a private equity firm or to another large public company. I felt that both suitors would treat my employees well (and I negotiated hard to make sure that was the case), and both offered a good asking price well above our value on NASDAQ,” he said.

“After raising what at the time felt like my first child, born in my living room and nurtured into a publicly traded entity, I was ready for it to take its next step and for me to take mine. I ultimately opted for the strategic sale, but I left the process intrigued by what was already an evolving dynamic between private equity firms and tech exits.”

A private equity sale wasn’t always on the table, and usually carried a stigma. Because that option is usually reserved for companies with huge revenues and profits, many startups assume they won’t qualify. But the option is becoming increasingly common, especially since most startups won’t reach the point of an initial public offering (IPO). In fact, Pitchbook says only 3 percent of venture-backed startups reach that stage.

Typically, a company will have to do a sale to a strategic buyer, aka another company.

“However, in the past few years, private equity firms have become aggressive buyers of private companies, sometimes bidding as high as or higher than strategic buyers,” Chopra said. “With one of my portfolio companies, a private equity buyer placed the second highest bid ahead of all but one strategic buyer and helped raise the final price from the strategic buyer just by being in the bidding process.”

The buyout can even help an early-stage startup, even if the company is struggling. A private equity firm can even help with marketing or sales and increase the value of a company.

“Unlike PE buyouts at later stages, PE buyouts at the earlier stages are not usually high-value exits; they are mostly an avenue to provide the founders some return for their hard work, rather than the disappointing returns they can expect from an acqui-hire or, even worse, a shutdown,” he said. “If negotiated correctly, a private equity deal can give founders an opportunity to play another hand to the next exit.”