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IPO or M&A? How venture capital shapes a startup’s future

Emily Cox Pahnke

Emily Cox Pahnke

For new ventures trying to get off the ground, any willing investor can look like a godsend.

But entrepreneurs, when seeking funding partners, should carefully consider who will own their startups once they’ve taken off.

This according to new research by Emily Cox Pahnke, an associate professor of management and organization and the Lawrence P. Hughes Endowed Professor of Innovation and Entrepreneurship at the University of Washington Foster School of Business.

Pahnke and co-authors Rory McDonald of Harvard Business School and Dan Wang of Columbia University examined initial funding and ultimate outcomes of more than 42,000 new ventures that launched between 1982 and 2014.

They determined that startups funded by a venture capitalist (VC) who tends to work with the same group of partners are more likely to seek a faster exit by selling the company to a larger one. In contrast, startups funded by a VC syndicate with less familiar co-investors are more likely to exit through an initial public offering (IPO) that could allow the founders to retain more control—albeit under the pressure of shareholder expectations.

Of course, these are best-case scenarios—for both founders and funders. Most VC investments yield no return at all.

“We asked a lot of VCs how they thought about acquisitions and IPOs,” says Pahnke. “And a quote that stuck with me the most was: ‘Hey, the best outcome is money. If we get an acquisition that returns any money, that’s actually amazing.’ Maybe we don’t talk about it as much, but that’s really important. Often, that’s a better outcome for a founder.”

The Past Is Prologue? Venture-Capital Syndicates’ Collaborative Experience and Start-Up Exits” is forthcoming in the Academy of Management Journal.

Read the full report at Harvard Working Knowledge.