Understanding Venture Capital Exit Strategies

Updated: 19/12/2022

Venture capitalists are investors who offer funding to start-ups or small businesses that want to grow. Beneficiary businesses are often seen to have tremendous growth potential, but the high failure risks associated with the possible return make funding from banks difficult or expensive.

Venture capitalists are people who are ready to take higher risks to gain higher profits in the future and invest in startup companies in exchange for a certain equity stake. Wealthy investors, investment banks, and other financial entities may be among them.

A creative company concept or an innovative technology startup is usually easy to get shortlisted by venture capital investors. The capacity to detect the growth potential of innovation is one of the most significant competencies of venture capitalists. They also have a considerable ownership share in the firms in which they invest, allowing them to engage in management. At the same time, the quit option is one of the important tactics for venture capital to quit from their investment cycle once achieve their profit targets.

Definition of Exit Strategy

Exit strategies are plans implemented by business owners, investors, traders, or venture capitalists to sell their stake in a financial asset if specific criteria are met. A withdrawal strategy explains how an investor intends to leave a particular venture. For instance, venture capital may design a departure strategy through an initial public offering (IPO).

On the contrary, an exit plan may be used to quit a non-performing investment or to end a loss-making firm. In this situation, the exit strategy's goal is to reduce losses. Catastrophic incidents or legal reasons such as estate planning or investors deciding to cash out are the reasons to implement an exit strategy.

Depending on the sort of investment, trade, or business activity, a good departure strategy should be established for every optimistic and bad scenario. This strategy should be done as part of calculating the risk of the investment, trade, or business activity.

Another term for exit is a liquidity event, and it refers to the conversion of an illiquid asset (stock in a business) into a liquid asset (cash). For VCs, acquisition and IPO are the two basic exit strategies of the investment and get the return on investment (ROI).

Business Exit Strategies VS Trading Exit Strategies

A business exit strategy is a plan in which an entrepreneur decides to liquidate their company's ownership to investors or another large corporation after a negotiation process. A quit plan enables a business owner to reduce or liquidate their ownership in a company while still generating a big profit if the company succeeds.

On the contrary, if the company fails, a departure strategy (or "exit plan") allows the entrepreneur to reduce losses. An investor, such as a venture capitalist, may also implement an exit strategy to plan for the cash-out of an investment. Before initiating a deal, a good investor should decide where they will sell for a loss and where they will sell for a profit.

An exit strategy is one of the vital keys to a trading plan. Many traders, for example, join a trade without an exit plan, and as a result, they are more likely to take profits too soon or, worse, run losses. Traders should be aware of the exits accessible to them and design a quit strategy that will minimize risks while locking in gains.

The differences between business exit strategies and trading exit strategies:

Business Exit Strategy Trading Exit Strategy
Business operations do not meet a predefined target. In the securities market, trading does not meet the predefined profit.
Cash flow dries up to the point that business operations are no longer productive. For losing trades, an investor should set an acceptable loss amount and use a preventive stop-loss.
External capital investment is no longer practicable. If a trade hits its profit objective, it can be liquidated immediately.
If another party has made an attractive offer for the company. Traders can be placed with a broker to sell or buy stocks automatically at a particular time or price.

Examples of Exit Strategies

Exit Strategy

Some of the most popular exit options for traders or owners of various sorts of investments are as follows:

  • You should start designing your exit plan in the years before, make sure you are able to fulfill obligations and increase your personal salary and pay bonuses to yourself. It is a common business retirement plan to implement.
  • The second strategy is selling all of your stock to current partners once you retire. You will get funds from the sale of your shares and will be allowed to leave the firm.
  • All of your assets should be liquidated at market value. Use the revenue to pay off debts and keep the remaining to plan your retirement.
  • Go through an initial public offering (IPO)
  • Proceed with an acquisition deal or merger with another corporation.
  • Transit the possession business to a family member.
Common exit plans, exit strategy
Common Exit Plans

Start-up Exit Tactics

Since the founding of their business, start-up founders have often established a departure plan. Entrepreneurs will use quit strategies to maximize their profit by selling their company at the proper moment. A great business leaving strategy will guide the entrepreneur through the entire business journey, ensuring that each stage fulfills the company's obligation to reach the ultimate objective.

For example, if becoming listed on the public stock market (an IPO) is the ultimate goal, your company has to go through specific financial steps such as pre-seed and fundraising from venture capitalists or angel investors to accelerate company development. NEXEA Group Sdn Bhd (Formerly known as NEXEA Angels Sdn Bhd) is a well-known venture capitalist who assists and funds Malaysian startups.

Exit techniques that are commonly used include:

Initial public offering (IPO)

An IPO, or initial public offering, as an exit plan offers the highest return potential for the rare company that has the ability to evolve into an industry leader, producing steadily expanding sales in excess of $50-100 million per year. Getting publicly owned and traded on the stock market is preferable to the private acquisition of a business.

An IPO is a new round of equity financing, similar to any previous Series A, B, or C round: new shares are issued at a specific price. These shares will divide present owners, but the total valuation of the company will increase as a result of the offering.

Following an IPO, the firm will have public shares in the open market, and the stock price may fluctuate second by second. There is now a specific value for the VCs' investment at any given time. The stock is available for purchase.

Merger & acquisitions

Mergers and acquisitions (M&As) are the most typical way for venture-backed enterprises to leave. Companies constantly combine and acquire one another. This is referred to as the M&A market (mergers and acquisitions). M&A aspects require complicated activities such as evaluating businesses and arranging stock purchases. There are similarities in the rhythms of negotiating a business deal.

Accordingly, M&A specialists must verify that the cultures of the two merging enterprises can coexist. However, the environment is frequently significantly different. Whereas startups are challenged by rapid expansion and recruiting, mergers and acquisitions are frequently burdened by cost-cutting and layoffs when two organizations merge.

Generally, exit through acquisition is the more usual but less unicorn-like path. It is the easier and less expensive alternative to going public. When a startup is acquired, it must give up its larger aim of becoming its own major, public corporation. Furthermore, an acquisition does not always mean a loss for the company because the deal is based on the market cap. There are certain acquirers who are large enough to purchase unicorns.

Make it your cash cow

If you find yourself in a stable and secure market, where your business generates a consistent stream of revenue, you can repay your investors and entrust someone reliable to manage it on your behalf.

Meanwhile, you can utilize the remaining funds to pursue your next innovative concept. By doing so, you retain ownership of your business and reap the benefits of a steady income.

Stock buybacks

Stock buybacks are a win-win exit strategy for both startups and VCs. In certain cases, the founder of a company believes that the firm has the capability and desire to grow independently, without interruption from any outside sources.

A stock buyback occurs when a corporation purchases stock from an angel or venture capital investor. In this exit, the VCs receive their funds directly from the firm rather than through new investors in an IPO or another company in an M&A.

The Importance Of Planning A Good Exit Plan

It may seem illogical for a business owner to develop a departure strategy. For example, if you run a startup business with rising rapidly, why would you want to sell it?

In fact, planning a quit plan is usually the most underestimated aspect of a business strategy. However, it is critical in deciding your company's strategic future. Business owners and successors may find that their future alternatives are restricted if an exit strategy is not proactively planned. It is important for an entrepreneur to launch a departure plan in the business journey.

For example:

  • Personal medical issues or a family crisis: You might be affected by personal health problems or a family crisis. These difficulties might distract you from efficiently running the business. An exit strategy will assist in guaranteeing that the business operation runs smoothly. 
  • An economic crisis: Economic crisis can have a significant influence on your business, and you may wish to avoid assuming the effects of an economic downturn.
  • A surprising offer: Large players may be interested in acquiring your business. Even if you do not want to exit the firm right now, you will be able to have an intelligent conversation if you have considered an exit strategy.
  • A well-defined objective: If you have a well-defined exit strategy, you will also have a clear goal. Your strategic decisions are strongly influenced by your exit strategy.
  • Creating a smooth transition of business possession: A well-planned exit strategy allows owners to simply hand over the business to the management team and other stakeholders.

The Best Time to Exit Venture Capital Financing

There is no one-size-fits-all exit strategy for venture capital investments. The best time to exit and the most favorable exit option will depend on a variety of factors such as the company's performance, market and economic trends, and the goals and desires of the founder and investors.

Some common indicators that it may be a good time to exit include:

  • The company has achieved its financial and performance milestones and is generating consistent revenues.
  • The market conditions are favorable for a successful exit (e.g. high demand for the company's products or services).
  • The company is receiving interest from strategic acquirers or other investors.
  • The company has reached a point where the founder and investors believe it can continue to grow and thrive without their continued involvement.

It's important for both the founders and investors to have an open and flexible approach to exits and be prepared to adjust their plans as necessary. Additionally, it is also crucial to consider the potential impact on the company's future and your own role in it when choosing an exit option.

In Conclusion

In conclusion, an exit option is a business strategic plan established by an entrepreneur to liquidate their ownership of a business to investors or another company. A quit plan allows a business owner to reduce or sell their ownership in a company while still making a significant profit if the company is successful.

Most of the investors or institutions making significant capital investments in private companies will also seek to manage exit points and exit strategies across their investments. Generally, an exit point and exit strategy are part of long-term business investment plans.

An initial public offering (IPO) may be the best way out for certain investors. In addition, an investor will set a profit objective and affordable loss as part of an investment portfolio. As a result, a well-planned exit strategy is critical for a startup company.


Understanding venture capital exit strategies

Business exit strategies and trading exit strategies

Examples of exit strategies

Start-up exit tactics

The importance of planning a good exit plan

Five Smart Exit Strategies

VC Funding For Your Startup

NEXEA provides Venture Capital funding for Startups from idea stages to pre-series A stages. We fund Startups in any industry, as long as there is a tech element to ensure your Startup is scalable. Find out more:
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