Exits
What is an IPO?
Quick Answer
An IPO (Initial Public Offering) is when a private company first sells shares to the public on a stock exchange, raising capital and providing liquidity for early investors. It's the highest-return exit path for VCs, though only ~1% of VC-backed companies achieve it.
Detailed Answer
An IPO transforms a private company into a publicly-traded one. For VCs, it's typically the highest-return outcome and the aspiration for every fund's best investments.
IPO process: 1. **Preparation (6-12 months before)** — Audited financials, corporate governance, board independence 2. **Select underwriters** — Investment banks (Goldman Sachs, Morgan Stanley, etc.) lead the offering 3. **SEC filing** — Submit S-1 registration statement (goes public as a document) 4. **Roadshow (2-3 weeks)** — Management presents to institutional investors 5. **Pricing** — Set IPO price based on investor demand 6. **Trading begins** — Shares list on NYSE or NASDAQ 7. **Lock-up period (90-180 days)** — Insiders (including VCs) can't sell immediately
IPO readiness criteria: - $100M+ annual revenue (typical minimum) - Consistent growth (30%+ YoY) - Path to profitability (or clear unit economics) - Strong management team with public company experience - Clean corporate governance
Alternatives to traditional IPO: - **Direct listing** — No new shares issued; existing shares trade directly (Spotify, Slack) - **SPAC** — Merge with a Special Purpose Acquisition Company (fell out of favor post-2021)
For VCs, IPO distributions typically occur after the lock-up expires, either as cash (selling shares) or in-kind (distributing shares directly to LPs).
Related Questions
What is an exit in venture capital?
An exit is how VC investors realize returns on their investment — typically through IPO (public offering), acquisition (M&A), or secondary sale. The exit is where returns are generated, usually 5-10 years after initial investment.
How does a VC-backed acquisition work?
In an acquisition exit, a larger company buys the startup. Proceeds flow through the liquidation waterfall: debt first, then preferred shareholders (VCs) get their liquidation preference, then remaining proceeds are distributed based on ownership percentages.
What is a secondary sale?
A secondary sale is when existing shareholders (founders, employees, or early investors) sell their shares to other investors before an IPO or acquisition. It provides partial liquidity without a full exit event.