Should an Entrepreneur Exit via an IPO or Sell? – The Influence of Network Effects

Abstract

We model the influence of network effects on an entrepreneur's decision to pursue an IPO or exit via an asset sale. Our model shows that strong network externalities (in the entrepreneur's product) make an asset sale a more attractive exit strategy. This effect requires that there is a potential acquiring firm whose product also has strong network externalities. Our model helps explain the propensity of new ventures to sell out rather than pursue an IPO as well as the high acquisition appetites of network firms such as Meta.

Keywords: Network Effects, Initial Public Offerings, Asset Sales

JEL Classification: G34, L26, D85