Startups and IPOs: Exploring All Options

Forerunner Ventures and the Evolving Landscape of Startup Exits

Forerunner Ventures initiated its support of a new generation of consumer-focused startups thirteen years ago, investing in companies such as Warby Parker, Bonobos, and Glossier. Notably, none of these ventures pursued a conventional initial public offering (IPO).

Alternative Exit Strategies Gain Prominence

Warby Parker became a publicly traded entity through a special purpose acquisition vehicle (SPAC). Bonobos was acquired by Walmart. Glossier remains a privately held company, mirroring the status of numerous other innovative brands within Forerunner’s investment portfolio.

According to Forerunner founder Kirsten Green, this outcome isn't indicative of setbacks. The current business environment increasingly favors alternatives to traditional IPOs.

Fintech company Chime and wearable tech firm Ōura, both founded in the early 2010s, represent further examples of Forerunner’s successful early-stage investments, achieving valuations exceeding $5 billion and demonstrating resilience in competitive markets. While Chime has filed for an IPO, Ōura’s CEO has indicated no immediate plans for a public offering.

Embracing the Secondary Market

During TechCrunch’s StrictlyVC event, Green expressed her acceptance of this trend. She affirmed that she isn’t concerned by Ōura CEO Tom Hale’s repeated statements regarding the company’s lack of IPO preparation, describing the company as an “off-the-charts phenomenal company.” Green added that discussions regarding a sale are premature, as the firm prioritizes ongoing growth.

She highlighted the adaptation of investors to a world with fewer traditional public offerings, and the increasing reliance on the secondary market for liquidity and portfolio management.

“We’re actively engaged in the secondary market, both buying and selling,” Green stated, characterizing this shift as both pragmatic and strategically advantageous. “Companies are delaying their public debuts for extended periods. Given the typical 10-year lifecycle of venture funds, achieving a valuation sufficient for a successful IPO or public market listing requires considerable time.” The secondary market is “continuing to drive the industry” and enabling “investors to realize returns and liquidity.”

A Shift in Industry Expectations

For seasoned industry observers, this represents a significant change. Previously, firms could anticipate a major liquidity event—an acquisition or a stock market debut—within a few years. However, the growing dependence on the secondary market isn’t solely a reaction to public markets that prioritize scale and favor established, high-performing companies.

Green further suggested that a broader range of participants in the pricing process leads to more efficient price discovery, even if it occasionally results in a discount on a particular investment.

Price Discovery and Valuation Fluctuations

Green referenced Chime, the neobank that gained prominence during the fintech surge, as an example. Its valuation has experienced considerable volatility in recent years, decreasing from $25 billion in 2021—following a funding round—to a reported $6 billion on the secondary market, before climbing again to $11 billion.

“Regarding valuations,” Green explained, “the Series D round involved negotiations between the company and a single investor. In contrast, the secondary market includes a more diverse group of participants. And ultimately, when a company reaches the public markets, everyone contributes to setting the price based on their assessment of its value.”

Early Investment and Long-Term Growth

Green’s firm can afford a more flexible approach to valuation. While substantial valuations are always welcome, Forerunner’s strategy of early-stage investment provides greater flexibility compared to other venture capital firms. “We prioritize early investment,” Green said, emphasizing the firm’s focus on identifying emerging trends in consumer behavior and aligning them with innovative business models.

This approach proved successful in the early 2010s with direct-to-consumer brands like Bonobos and Glossier, which capitalized on the rise of mobile and social media. It also yielded positive results with subscription-based businesses like The Farmer’s Dog, a gourmet dog food company that is both profitable and generating $1 billion in annual revenue.

Focus on Innovation and Cultural Impact

The firm is now concentrating on the convergence of innovation and culture, as Green describes it.

Green emphasized that successful companies require time to mature and that growth trajectories can vary. Venture capital, traditionally focused on quick exits, is learning to adopt a longer-term perspective and explore alternative strategies when necessary.

(You can listen to our conversation with Green from this same sit-down right here, via the StrictlyVC Download podcast; new episodes are published each Tuesday morning.)