Public Markets

Sell Your Company Or Go Public? IPO vs Direct Listing vs SPACs

By Shirish Nadkarni

Most entrepreneurs dream big that one day their company will have a successful multibillion-dollar IPO. While most entrepreneurs would love to go all the way, the reality is that most startups find an exit through an acquisition, if they’re lucky.

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The key for a successful acquisition is for your company to “get bought not sold.” The best time to sell your company is when the economy is booming, and your company is experiencing strong year-over-year growth. Typically, in these situations, acquisition interest is strong and revenue multiples are high.

However, that is precisely the time entrepreneurs get overconfident and are least likely to want to sell. It is important, therefore, for the board of the company and the founders to seriously evaluate any acquisition interest and hire an investment bank to survey the market to determine potential exit outcomes. An investment bank is also in the best position to get the best outcome for the company by pitting potential acquirers against each other.

Below we will go a bit further into the types of exits outside of acquisition.

Going public

In many situations, if the company has achieved revenue scale (upwards of $100 million), is growing rapidly (at least 30 percent YoY growth) and has a path to profitability, then the company should evaluate going public.

Going public is not for the faint of heart — there are significant expenses involved and the stock price can take a significant hit if the company misses its revenue targets.

But unlike in the past, there are now multiple paths for going public: an IPO, a direct listing or merging with a special-purpose acquisition company, or SPAC.

IPO process

The path to doing an IPO is long and arduous.

You need to have hired an experienced CFO who has ideally taken a company public. The Sarbanes-Oxley Act of 2002 significantly raised the bar for financial reporting for public companies. It is, therefore, essential for companies to have the discipline and capability to start reporting internally on a quarterly basis. While doing an IPO has been traditionally the way most companies have gone public, it has been criticized for leaving too much money on the table. For example, data compiled by Jay Ritter, an IPO expert and a professor at the University of Florida, suggests that top investment banks Goldman Sachs and Morgan Stanley have underpriced their IPOs on average by 33.5 percent and 29.2 percent, respectively.

Direct listing

Direct listing is an emerging trend for startups to go public in cases where those companies don’t need to raise money and can directly list their shares on one of the stock exchanges.

Spotify pioneered this model when it went public on the New York Stock Exchange in 2018.

In a direct listing, no shares are sold by the company. Instead, the insiders — founders, investors, employees — sell their stock directly to the public. The key benefit with a direct listing is that the stock is priced at the true market price as compared to an IPO. However, the stock price is subject to market supply and demand and potentially significant market swings. And no funds are raised by the company as in a traditional IPO.

Merging with a SPAC

SPACs are an alternative way for companies to go public where the funds are first raised in an IPO by a “blank-check” company followed by a merger with the target company.

The SPAC process provides several benefits compared to a traditional IPO. For one, it provides the ability for earlier-stage companies to go public. Generally, these companies have lower revenue and are still incurring significant losses.

It provides for greater market certainty on the share price at which the company goes public as the acquisition price is negotiated with the SPAC. However, because the business models are typically not mature, there’s greater risk that the company will miss its projections causing the stock to tank as a result. The jury is still out on whether SPACs will survive as a funding mechanism as there are too many SPACs chasing too few opportunities which could lead to poorer outcomes.


 Shirish Nadkarni is a serial entrepreneur. He engineered Microsoft’s $400 million acquisition of Hotmail, launched MSN.com, and founded Livemocha, which pioneered the concept of social language learning and was acquired by Rosetta Stone. He is the author of the new book “From Startup to Exit: An Insider’s Guide to Launching and Scaling Your Tech Business.”

Illustration: Dom Guzman

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