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The Art of Venture Capital Exits: A Comprehensive Guide

Updated: Apr 6, 2023

As a venture capitalist, you have invested time, effort and resources in a start-up, with the expectation that it will grow and generate substantial returns. However, sooner or later, you will have to exit the company, either by selling your shares or taking it public. Knowing when and how to exit is crucial, as it can determine the success or failure of your investment.

Types of exits


There are several ways for venture capitalists to exit their investments. The most common are:


  1. Acquisition: This is when a larger company buys the start-up, either to absorb its technology, talent, or customer base. This is the most common type of exit, accounting for over 80% of all exits.

  2. Initial Public Offering (IPO): This is when the start-up goes public, and its shares are traded on a stock exchange. This is a more complex and time-consuming process than acquisition but can lead to much higher returns.

  3. Secondary sale: This is when the venture capitalist sells their shares to another investor, without affecting the company's ownership structure.


Factors affecting exit decisions


Several factors can influence a venture capitalist's decision to exit a portfolio company, including:


  1. The company's performance: If the company is growing rapidly and meeting its targets, the investor may hold on to their shares for longer, to maximise their returns.

  2. The market conditions: The investor will consider the state of the market and the demand for the company's products or services, as well as the potential for future growth.

  3. The investor's objectives: The investor may have a specific time frame for exiting their investment, depending on their fund's life cycle or their own financial needs.


Exit strategies


To maximise their returns, venture capitalists can use several exit strategies, including:

  1. Build to Sell: This strategy involves building a company with the intention of selling it within a set period, usually 3-5 years. This requires careful planning and execution, as the company must be positioned for a successful exit from the outset.

  2. Hold and Harvest: This strategy involves holding on to the company's shares for as long as possible, while extracting cash from it through dividends or other means.

  3. Partial Exit: This strategy involves selling a portion of the investor's shares, while retaining a stake in the company to benefit from future growth.


Conclusion


Exiting a portfolio company is an essential aspect of venture capital investment, and knowing when and how to exit is crucial. The type of exit, the factors affecting exit decisions, and the exit strategies used can all impact the success of the investment. By understanding these factors and planning for them, venture capitalists can maximise their returns and achieve their investment objectives.


Enquiries


For further information, please contact info@langdoncap.com


About the author


Sabbir Rahman is Managing Director of Langdon Capital. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.


About Langdon Capital


With a network of 700+ alternative investors, Langdon Capital raises debt and equity capital between £1m and £25m for high-growth and innovative companies in the technology, environmental impact and renewable energy sectors, who are preferably beyond a Series A funding round or equivalent, to help them fulfil their paths to profitability and growth ambitions.




This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.

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