Startup Exit Strategy- Exit Options for Venture Capitalists and Founders

What does it mean to leave the startup (Exit)? Why is a startup exit strategy the most important step in the management process of a venture capital fund? How many years after investing in a startup do venture capitalists exit on average? What are the types of exit strategies for a startup? What are the factors required for a successful exit from a startup?

In this article, you will learn about the concept of leaving a startup, its importance and options. In the next blog posts, the importance of scheduling, examples of the most successful exits, as well as the exit behavior of venture capital funds in the world will discussed.

Learn more: The Most Prevalent Startup Valuation Methods

What does it mean for the founders to leave the startup?

The path taken by the founder of each startup is four steps:

  • Building
  • Attracting capital from venture capitalists
  • Increasing the scale
  • Exiting

In the meantime, leaving the startup and receiving liquidity in exchange for owned shares will be the last step. It will determine the entrepreneur’s share of the value of his adventure.

Suppose a successful startup in the middle stages of development has a request to sell all its shares to a large, all-industry company. The large company is motivated by the startup technology and wants to use it to create a competitive advantage and increase economic profit. It has offered to buy at a much higher amount than the startup’s value in the last stage of raising capital.

It is clear that with the approval of the startup board of directors, all shareholders, including founders, venture capitalists and perhaps personnel, will sell their shares in exchange for cash, shares of the buyer company or a combination of the two and leave the startup. (Of course, when the startup does not receive a purchase offer, the founders themselves, if they wish to leave the process, take the time to introduce the startup to other companies.)

Startup exit strategy

The importance of exiting

We can say that the importance of exit for startup founders is less compared to venture capitalists. Because, unlike venture capitalists, entrepreneurs usually do not have a time limit. The life of a venture capital fund is limited (10 years). This means that by the end of this period, the fund will have to return from startups in the portfolio. Then it should be distribute among the fund’s investors. (wealthy institutions such as pension funds, some banks and insurance companies, charities and academia, large corporations, etc.).

On the other hand, the entrepreneur may not think seriously about leaving the startup. That’s because of the deep connection they have with their startup.

In my opinion, a real entrepreneur (a person who can build other companies from A to Z) has betrayed his abilities if he does not leave the startup (of course, after ensuring the relative stability of the startup status) and launching other startups. (I suggest you listen to this podcast from Gigster founder Roger Dickey.)

What does the exit of a venture capital fund mean?

The path taken by a venture capital fund is divided into four stages:

  • Attracting capital from rich institutions
  • Identify startups and investments
  • Management and supervision of startups in the portfolio
  • Exiting

From the perspective of a venture capitalist, leaving the startup and receiving liquidity in exchange for owned shares is the last and most important stage of this process. This stage occurs on average 5 to 7 years after the investment. It is the most important step from this perspective, which will determine the amount of return on investment (Capital Gain).

This process has another feature in addition to being “key”: “difficult.”

Unlike investors active in public financial markets, venture capitalists face major problems with pricing and liquidity. That’s because they do not have the opportunity to sell their stock in the stock market.

Therefore, it is important to examine the existing exit strategies, which unfortunately do not have much variety.

In the following, we will introduce these startup exit strategies.

Exit startup strategies


The main strategy for leaving a startup is to sell shares to a larger company in the same industry. This is in exchange for cash, shares of the buyer company or a combination of the two. Usually, the goal of the larger company (buyer) is to acquire, benefit and use the product or technology of the smaller company (target company). It is in a way that leads to competitive advantage and ultimately to an increase in economic profit.

Usually, in this type of exit, the key managers and employees who are shareholders will continue their cooperation with the buyer company. Tis will continue until the acquisition is transferred to them according to the assigned transfer plan.

In fact, the basis of this type of acquisition is the expected synergy between the product or service provided by the target company and the buyer.

Another type of acquisition (Acquihire) is based on the capabilities of the founding team of the target company. In other words, the buyer company does not value the current product of the target company. It wants to own the team and transfer them to their company by offering very high salaries and benefits. This type of acquisition is in the early stages of development. That’s why it does not lead to significant returns for shareholders.

Mergers and Acquisitions

This process involves the merger of two similar and equal companies (Merger of equals) and the acquisition or takeover of a smaller company (target) by a larger company (buyer).

The difference between the two processes is in the formation and non-formation of a new company. In other words, in the case of a merger, a new company is created, while in the acquisition, there is no change in the name and brand of the buyer after the purchase of the target company.

The purpose of this process, in which the company is acquired by a similar and larger company, is to increase efficiency, market share and ultimately the economic profit of the buyer company by exploiting some of the characteristics of the target company, such as:

  • Capabilities
  • Resources
  • Products
  • Geographical area of service
  • Technology or intellectual property
  • Stock growth potential
  • Customer community
  • Profitable operations

Of course, sometimes two companies are in the same industry and competitors, and the purpose of mergers and acquisitions is simply to eliminate existing competition.

To see a chart of the total value of mergers and acquisitions on a global scale from 1985 to 2018, refer to this link.

Due to the complexity of mergers and acquisitions, many companies that intend to acquire smaller companies are pursuing this process alongside financial consulting as well as financing companies.

Some adult and large companies have systematic plans to monitor existing mergers and acquisitions and perform this process annually (Programmatic M & M&A).

Trade Sale

This exit mechanism is the sale of shares to an entrepreneur or other company. Of course, the occurrence of this process in the real world, despite its simple concept, is not so easy. The reason is the unwillingness of the founders to share the company with other people. (Sahlman Studies, 1990; Gompers and Lerner, 1996, 1999a address the agency problem between founders and new corporate owners due to the outflow of venture capital funds.)

Sometimes the founders demand a formal commitment from the venture capitalist not to use this mechanism.

According to the best practices of using this type of exit by venture capital funds, the most common causes of this process occur in two modes. They are LBO (Leveraged Buyout) and investor use of his Drag-along right. Because in these two cases, the venture capitalist as a shareholder can 100% Sell shares of the company.

Trade sale
Trade sale

Buy Back

This exit process, which is more common for investors in the maturing stages of companies, Private Equities, is simple and very popular.

In this type of exit, the founder himself or the company buys the venture capitalist shares. A prerequisite for such an exit is a puttable share contract between the venture capitalist and the founder.

A critical point in this type of exit is the liquidity of the founder. In fact, signing this agreement and granting the right to repurchase the shares to the founder may come across some issues. For example, suppose there is not enough liquidity available to the founder. In that case, it may lead to the risk of negotiations and bargaining to reduce the stock price or consider a time period to pay part of the amount. 

IPO or the sale after the IPO

The dream of every venture capitalist is to exit through the initial public offering. That’s because this exit strategy will lead to the highest possible return on investment. Of course, the probability of this dream happening is very low (suppose 1 in 100). In other words, out of every 100 invested in startups, only one succeeds in selling shares to the public.

This type of exit strategy is usually when the company has matured and cannot raise capital from venture capital funds or private funds. Suppose the company fulfills the prerequisites and conditions necessary for generalization. In that case, it will sell a part of the shares to the public after leaving behind the essential and relatively complicated preparations for the initial public offering of shares. However, venture capitalists may not sell their shares for a certain period after the event if they own a significant percentage.

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