VENTURE CAPITAL
NOEL J. MAQUILING, MBA CAR, MICB, CFMP, MOS
Exit
A contingency plan executed by a venture capitalist, or
an investor, or a business owner to liquidate a position in
a financial asset or business assets once predetermined
criteria has been meet or exceeded.
It may be executed when an investment or business
venture has met its profit objective.
EXIT STRATEGY Other reasons for executing an exit strategy may include
significant change in market conditions due t a
DEFINITION catastrophic event or legal reasons or for the simple
reason that an investor or business owner is retiring or
wants to cash out.
It may also be executed to exit an a non-performing
investment or close an unprofitable business to limit
losses i.e. cash flow draws down, operations do not meet
predetermined milestone.
EXIT OPTIONS
Sale to
Initial Public Merger and Shares Other Sale in OTC Management
Offering Acquisition Buyback Strategic Market Buyout
Investors
Also called as Stock Market Launch
Involves a private company offering its shares to the public
for purchase for the first time
Referred to as taking a company public
The original investors in the private company can make
fortunes because the new stock is worth much more than
INITIAL PUBLIC their original investment
OFFERING
Note: If the company has done well, the venture capital investors
will take the IPO route, by issuing shares registered for public
offering. An example is the upcoming Facebook IPO, which is
expecting to raise about $15 billion through IPO and is valued at
approx. 100 billion. The venture capital investors and other private
investors will get their portion of shares who can put them in the
open marketplace for trading after an initial lock-in period.
A merger is a combination of two companies to form a new
MERGER AND company
ACQUISITION An acquisition is the purchase of one company by another
in which no new company is formed.
The promoters buy back VC’s stake at predetermined price
and keep the ownership control with him.
SHARES BUYBACK VC considers it as an exit option only when promoters are
in position to mobilize funds for buy back of equity held by
the venture investors.
In this method the entrepreneur buys-back the investment
share from the venture capitalists and takes it back to being
a privately held company.
Investors who invest in a venture capital fund get
distributions of public stock or cash from realized venture
capital investments. Sometimes the fund may require
SHARES BUYBACK further investments from limited partners. At other times,
they may make cash or share distributions at random times
during the lifetime of the fund. Investors can sell their
interests to another buyer if they find one.
In a bad case scenario, some funds find themselves with
highly illiquid, barely there companies. In a good scenario,
they have good investments, which they disinvest from at a
stage and find new investments to fund.
VC sells his stake to the strategic buyer who already owns a
business or has plans to enter target industry.
SALE TO OTHER The benefit is typically liquidity because if VC sells the
STRATEGIC company to a strategic acquirer he might be able to sell
most or all of his stock.
INVESTORS
The acquirer may or may not retain the management team,
and may or may not make substantial changes in the
company’s operations, staff, and business lines.
Over-The-Counter can be used to refer to stocks that trade
via dealer network as opposed to on a centralized
exchange.
SALE IN OVER-THE- OTC markets are typically bifurcated into the customer
COUNTER MARKET market where dealers trade with their clients such as
corporations and institutions, and the interdealer market
where dealers trade with each other.
The price a dealer quotes to a client may very well differ
from the price it quotes to another dealer.
A transaction where a company’s management team
purchases the assets and operations of the business they
manage.
A management buyout (MBO) is appealing to professional
mangers because of the greater potential rewards from
being owners of the business rather than employees.
MANAGEMENT The financing required for an MBO is usually a combination
BUYOUT of debt and equity that is derived from the buyers,
financiers, and sometimes the seller.
The advantage of MBO is that as the existing managers are
acquiring the business, they have a much better
understanding of it and there is no learning curve involved.
Another advantage is that the company’s debt load may be
lower, giving it more financial flexibility.
TRADE SALES: In this type of strategy the private
company is sold or merged with an acquirer for stocks,
cash, or a combination of both.
OTHER EXIT WRITE-OFFS: These are voluntary liquidations that may
OPTIONS or may not result in any proceeds.
BANKRUPTCY: The company may just go bankrupt.
Personal health issues or a family crisis: You may be
affected by personal health issues or experience a family
crisis. These issues can take away your focus on effectively
running the company. An exit plan would help ensure the
company will be run smoothly.
An economic recession: Economic recessions can have a
significant effect on your company and you may want your
IMPORTANCE OF AN company to avoid assuming the impact of a recession.
EXIT PLAN Unexpected offers: Large players may look to acquire
your company. Even if you do not have any intentions of
immediately selling the company, you would be able to have
an insightful conversation if you have thought of an exit
plan.
A clearly defined goal: By having a well-defined exit plan,
you will also have a clear goal. An exit plan has a significant
influence on your strategic decisions.
