The Business of Venture Capital, 3rd Edition

33Exit Strategies

“For I must tell you friendly in your ear, Sell when you can, you are not for all markets,” writes William Shakespeare, in As You Like It (Act 3 Scene V). The bard knew about the temptations of a VC. When a portfolio company is acquired, or its stock trades on the public exchanges, those rare (and hopefully happy) moments are what we live for, celebrate, and, at times, heave a sigh of relief. Capital invested comes back to LPs, completes a full circle, and an investor “exits the investment” by selling the stock of the portfolio company.

EXIT OPTIONS

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. As seen in Exhibit 33.1, data from VentureSource samples show that 13 percent of exits end up in an IPO while 43 percent are acquisitions. A typical portfolio sees losses well above 40 percent of its companies.

Exhibit 33.1 Frequency of portfolio outcomes.

Data: VentureSource

IPO	M&A	Failure
13%	43%	44%

• 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. Many M&A exits are disguised failures, where over 20 percent of investments have ...