What's your plan for a successful exit strategy?

1 Know your options

Venture capital investments can be exited in various ways, depending on the stage, size, and performance of the portfolio company. Acquisitions are the most common and preferred option, as they provide a quick and lucrative payout. However, IPOs can be more rewarding, allowing venture capitalists to sell their shares at a market price which may be higher than the acquisition price. Secondary sales involve selling one's stake in the portfolio company to another investor, like a private equity firm or hedge fund, but usually imply a lower valuation and longer holding period. The worst-case scenario is a write-off; when the portfolio company fails to achieve its goals and becomes insolvent or liquidated, resulting in a total loss of investment.

2 Align your interests

Prior to investing in a portfolio company, it is important to have a clear and realistic expectation of your exit strategy. It is also essential to communicate and align your interests with the founders and other investors of the company. This will help prevent conflicts and misunderstandings later on, as well as ensure that everyone is working towards the same goal. Some of the aspects that should be discussed and agreed upon include the exit horizon, criteria, and terms. The exit horizon will depend on your fund size, duration, objectives, and the growth potential and maturity of the portfolio company. The exit criteria will depend on your target return, risk appetite, and market conditions, as well as the performance and valuation of the portfolio company. Lastly, the exit terms will depend on the terms of your investment agreement, such as the liquidation preference, drag-along and tag-along rights, and anti-dilution clauses.

3 Prepare for exit

Once you have established your exit plan, you should monitor and support your portfolio company to achieve the best possible outcome. To prepare for the exit process, it is important to regularly assess the value of your portfolio company, keep records and documents updated and organized, as well as showcase the success and potential of your portfolio company to potential buyers or investors. These activities will help you determine the optimal exit timing and price, expedite the exit process, and generate interest and demand for your exit opportunity.

4 Negotiate and close

When you have identified and selected your exit option, you should negotiate and close the deal with the buyer or investor. You should consider the structure, price, and terms of the deal. The structure will affect the tax implications, liabilities, and governance of the deal. Negotiating the best exit price for your stake should be based on your valuation, bargaining power, and market conditions. It is also important to consider payment terms such as cash and stock components, escrow and earn-out provisions, contingencies, and adjustments. You should also negotiate the best exit terms for your rights and obligations such as representations and warranties, indemnifications, covenants, closing conditions, lock-up periods, non-compete clauses, and transition services.

5 Learn and improve

After you have completed your exit, you should evaluate and learn from your experience. You should analyze the performance and outcome of your exit, and identify the strengths and weaknesses of your exit strategy. You should also solicit and incorporate feedback from your portfolio company, your co-investors, and your buyers or investors. This will help you improve your exit skills and optimize your future exit opportunities.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?