Exit Strategy

An exit strategy refers to the plan an investor has in cashing out assets to get out of the investment.

The assets can be real physical assets like real estate and also be intangible assets like stocks of a company.

The exit strategy is usually mentioned in the context of realize a paper gain or getting out of a position by liquidating asset holdings before losing more money.

An investor or venture capitalist would always have a way of exit in mind as they are mostly, if not purely, in for the money.

So they may always have a strategy of selling their holdings once a certain milestone has been reached. Such as when a certain target value of assets is met or when a private company goes public with an IPO.

Saying that, it is not impossible for a person or entity to have no exit strategy as the thought of selling a company has never been on the mind of a founder.

Why the exit has to be planned

The term exit strategy is usually used in two context.

  • Business exit
  • Trading exit

The business exit refers to the selling of shareholdings in private companies, usually through acquisition by larger companies or simply to other investors.

A trading exit refers to the selling of securities on the equity markets. When the order has been put in to sell a certain stock once the price hits $5 for example, then that is the exit strategy.

From a business standpoint, any investor or business person who is investing with a logical mind needs to fully lay out all the stages of his or her involvement. This includes how and when to exit the investment.

The main reason for doing so is that any returns or capital gains are not real profits until they are realized.

And one cannot realize that until the financial asset in question is sold to another party.

Especially with investing in startups, business exit strategies need to be planned in advance, and all exit opportunities that arise must be considered as it might not be easy to sell the common stock of a private company.

New investors in private companies might think that they can easily sell their shares to another interested party. But that might not be as easy as it sounds.

This is because a startup might constantly organize fund-raising rounds to raise more money for company operations. It raises money by selling more of it’s company shares.

So if someone wants to buy shares in a company, why not purchase it directly from the round instead of from an individual whose credibility and intentions might be questionable?

How is the average private investor going to conduct due diligence in a private deal? He might not even know where to start.

Investors in private companies usually have two types of exits that they desire.

  • Acquisition by big companies
  • Initial public offering

In an acquisition, a larger company buys the startup. Allowing investors to exit their early investment in the company.

However, acquisitions might not allow all shareholders to exit because the acquiring company might only be buying out a controlling stake in a startup rather than 100% of it.

In such circumstances, many smaller investors might be left in limbo as they are unable to cash out.

This is why the most favored exit strategy is for a private company to IPO and get listed on the stock exchange. It also allows the public to value the company.

This way, every shareholder would find it very simple to divest. Just call up the stock broker and place the order.

The exit should not only be about realizing paper profits.

A lot of times, investments in startups don’t turn out to be smart at all. They burn up a lot of cash by paying themselves huge salaries and waste funds by spending on lavish corporate events.

In this case, one must consider such potential outcomes and conceptualize a plan of how to get out of the investment and recoup as much money possible.



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