The M&A Exit Outcomes of New, Young Firms

We examine the M&A exit behavior of new, young businesses and the way the exit is shaped by their innovative capabilities and their growth in employment. Using a large sample of startups founded in 2004, we find that businesses organized as corporations had very different acquisition outcomes than those organized as sole proprietorships. These different acquisition outcomes could be explained by differences in innovation and growth potential in the startup year as well throughout the business' lifetime. Our results suggest that higher innovation and employment growth explain the likelihood of M&A exit for new, young corporations but not for sole proprietorships. These results indicate that acquirers value the growth potential signaled by corporations through intellectual property rights and growth in employment and, therefore, businesses with high quality innovations are the most attractive targets for acquisitions. Young corporations with external equity investors are more likely to become M&A targets, as angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the business becomes an acquisition target. Our results also show that young corporations owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer's perspective, entrepreneurs with startup experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors