The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 24 Exit Strategies

“For I must tell you friendly in your ear Sell when you can: you are not for all markets.”

—William Shakespeare, As You Like It, act 3, scene 5

A portfolio company is acquired, or its stock trades on the public exchanges; those rare (and hopefully happy) moments are when the practitioner celebrates or, possibly, heaves a sigh of relief. Capital invested comes back and completes a full circle—an investor “exits the investment” by selling the stock of the portfolio company.

The two primary exit options, acquisitions and initial public offerings (IPOs), are reviewed, along with private exchanges—an emerging option with implications for some highly sought-after technology companies.

• Mergers and acquisitions (M&A or trade-sale): Mergers and acquisitions is the most popular path of exit for a venture-backed company. Also called trade sale, a portfolio company is sold to a larger company. The transaction nets a return for investors, who in turn share the spoils with their limited partners.

• Initial public offering: An IPO is a highly desired badge of honor; investors list a company on a publicly traded stock exchange and sell privately owned shares for the first time to the public. Of course, fewer companies can demonstrate the growth and value to be considered IPO ready. And after they are ready, the Securities and Exchange Commission (SEC), the federal regulatory body, prescribes rules and regulations on public offerings to keep everyone honest. Some ...