AllBusiness.com

What are the ways a venture capital firm will exit an investment?

Finance

A venture capital firm enters a relationship with a company with the expectation that a significant return of investment will result when the firm exits the investment. The firm plans for that exit to take place within a certain amount of time, usually from three to six years, depending on the development stage of the company in which it is investing.

There are several common exit strategies:

  • IPOs: An IPO -- or initial public offering -- is a company's first public stock offering, which takes place when a company goes public by registering its securities with the Securities and Exchange Commission.
  • Mergers and acquisitions: In an era of large companies dominating industry landscapes, acquisition is often the targeted and most common exit strategy. Smaller companies have, in essence, become the research and development arm of larger companies who often look to buy them once their innovations can contribute to their own profitability.
  • Redemption: Another alternative is that the company may be required to buy back a venture capital firm's stock at cost plus a certain premium. Often a venture capital firm will put a redemption clause (sometimes referred to as a "buy-back clause") in the investment terms which allows them to exit their investment in your company in the event that an IPO or acquisition does not happen within a designated time period.