The exit strategy is the VC’s way of cashing out on its investment in a portfolio company. A VC often hopes to sell its equity (stock, warrants, options, convertibles, etc.) in a portfolio company in three to seven years, ideally through an initial public offering (IPO) of the company. The company becomes liquid through the sale of its stock to the public and the VC sells its stock to reap its return.
While an IPO may be the most visible and glamorous form of exit, it’s not the most common. Most companies are sold through a merger or acquisition event before an IPO can occur. If the portfolio company is bought out or merges with another company, the VC receives stock or cash from the event.
Another alternative may be the reorganization of a portfolio company’s debt and equity mixture, called a recapitalization. The VC exchanges its equity for cash, the management team gains equity incentives, and the company is positioned for future growth.