Exit Strategies - a Driver of Fundraising

Exit Strategies

Getting the investment back is characterized as the major concern of the investors and venture capitalists. Thus, a practicable exit mechanism is very important to the development of a VC industry. There are at least 6 types of exit strategy being: sale of the company’s shares in a public offering, sale of shares to another company, repurchase of the shares by the company, sale of shares to another investor, reorganization of the company, and liquidation of the company, but I will discuss here only the first option, the IPO, since according to Barry et. al. (1990) the IPO is the most used strategy chosen.1 Furthermore Jeng and Wells (1999) regarding fundraising, also tested empirically this strategy since a study made by Venture Economics (1988) shows that investing in a firm and eventually in a average period of 4.2-year gives an average return from 195%, while a trade sales gives an average return of just 40% over a 3.7-year average holding period, comparing IPO and Trade Sales, the first option give much more control for the entrepreneur than the second choice.

Eventually the venture capitalist will liquidate the investment and an IPO can incentive this motivation as much for entrepreneurs as for investors. Gompers (1996) argue that only successful firms go public, therefore as first advantage this is a sign for the good reputation of the venture capitalist. Besides according to Black and Gilson the venture capitalist receives his investment back and can also receive another benefit, as a company's right. In the other hand, the entrepreneurs next to the liquidity and an incentive for equity-compensated managers they receive the most important rights to continuous with the company.2

Demand and supply of VC are affected by increased volume of IPOs as well. “On the demand side, the existence of an exit mechanism gives entrepreneurs an additional incentive to start a company. On the supply side, the effect is essentially the same; large investors...