After a quiet 2022 and subdued market through most of 2023, the IPO market seems to be slowly rebounding, with IPO volumes in Europe and the U.S. up by 38% (year to date) vs the same period last year.

But IPOs aren’t the only exit option founders have. What are the other exit options—and what is the current exit landscape like for European startups? 

We asked Matt Gehl, head of EMEA technology investment banking at J.P. Morgan, Rosh Wijayarathna, U.K. & Ireland Innovation Economy lead at J.P. Morgan, and Bradley Channer, CFO of B2B SaaS company UBIO who has worked on four exits, what’s going on with startup IPOs this year and how else startups can exit. 

IPOs continue to reign

This quarter saw several IPOs in Europe and the U.S., with some of the largest ones coming from tech and renewable energy. As the IPO market sees some activity, the emergence of AI-focused companies is also expected to create a pipeline of tech sector exits.

Wijayarathna says that an IPO exit is “always going to be a hugely attractive option because valuations have the potential to be higher than any other exit—which is clearly important for shareholder value. There's also more publicity that goes with an IPO, which is a key incentive for the company, the management team and the investors.”

He adds that another huge benefit of an IPO is that a founder can remain at the helm: “There's no other exit option out there that allows a founder to remain in charge of their company, other than doing nothing. An IPO allows you to access different pools of capital while keeping that strategic leadership of the company.”

Channer is of the opinion that there isn’t much of an appetite for IPOs at the moment. 

“The market is pretty shocking in terms of IPOs that have floated recently — but also the cost to do an IPO is a massive barrier,” he says. “So no one's going to want to float, and no one should want to float a business on an exchange that isn't the London Stock Exchange or an overseas equivalent.”

To wait, or not to wait

Wijayarathna says that compared to 2021 and parts of 2022, valuations are still at a low, so now might not be the right time for most companies to exit. Channer agrees, adding that instead of exiting, if you continue to raise privately, you can boost up the value of your eventual exit. 

“The markets will come back, and valuations will come back,” Wijayarathna says. “You can see from IPOs that happened recently both in the U.S. and Europe: there are a number currently trading below their IPO. This is not peak valuation time, so you would only be exiting if you had to, or if you had an offer that you couldn’t say no to.” 

In October, sandal maker Birkenstock's stock ended more than 12% below its IPO price, signalling that investors remain cautious about new listings.

“The big thing is that if you’re in the private market, you have a lot more ways of being able to control what the value of your company is,” says Channer. “As soon as you float that company, you have a lot less control. The market is then controlling what the company is, so you've lost that power.”

Wijayarathna adds that companies should consistently be thinking to get themselves “exit ready,” so if markets are attractive, you are in the best possible position to consider your options—you’re ready and you’re in complete control in a turbulent market. 

“In the next 12 to 18 months, you've got elections in the U.S. and the U.K., inflation, interest rates potentially capping out, volatility in oil prices, geopolitical instability—you've got a lot of macro events that can have a direct impact on valuations,” he says.

M&A, is bigger actually better?

Acquisitions can represent happy exits for many startups when goals and terms are aligned. But driven by macroeconomic instability, European M&A deal value dipped by 55% from the first half of 2022 through the first half of 2023—exceeding the 45% drop globally, according to Gehl. 

That said, he says there are signs of life in the tech M&A market moving through the second half of the year due to a combination of hopes for a peak in the rate cycle and positive performance of the share prices of many acquirees, which breeds buyer confidence and increasing acceptance of the new lower valuation environment by sellers all take hold.

Provided the global economy can avoid a recession in 2024 the outlook looks brighter for tech M&A now than it has at any period since late 2021, says Gehl.

He adds that startups should think of their exit strategy right from the start, and when onboarding big clients, think of them as potential buyers and whether they would be able to afford your ideal valuation: “If I am looking at pivoting or scaling a company, I’d look at whether we are selling the right products to attract those kinds of people.”

Pre-IPO funding options have unfrozen

With the temporary delay in IPO windows caused by macro and geopolitical uncertainties, companies and investors have started looking for alternative paths to growth funding and liquidity. In this context, pre-IPO rounds constitute a natural solution to bridge the gap between private and public markets in the current environment, says Gehl.

A pre-IPO round is the last fundraising round in the life of a private company which has the ambition to IPO in the following 18-24 months.

Those pre-IPO rounds usually come at a later stage of a startup’s life, once it has built the foundations of a proven business plan, displayed a clear and solid growth trajectory—and demonstrated profitability or at a minimum a clear path to profitability. 

Gehl says that this option provides multiple benefits to private companies, such as additional cash runway to continue funding their growth or strengthen their capital structure. 

“Pre-IPO rounds also allow employees and early investors, usually early-stage VCs, to monetise their stake, realise their returns and potentially fully exit.”

In parallel, Gehl says bringing in late-stage institutional investors ahead of a potential IPO can have a positive branding and signalling effect for the company.

^{This article originally appeared in Sifted, the FT-backed publication about high growth startups in Europe.}

^{JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/commercial-banking/legal-disclaimer for disclosures and disclaimers related to this content.}