If you accept funds from an external investor, you must share information about your company with them and delegate some decision-making. You can draw up a shareholders' agreement to establish how joint decisions will be made, and to balance the interests of different shareholders.
The shareholders' agreement will also cover the rights and duties of your investment fund managers, eg:
- receiving regular company performance reports
- consultation on important decisions, eg business acquisitions and disposals
- control of the exit process
Day-to-day operations
You should keep in contact with your fund managers, as they can help you with strategic decisions and issues such as:
- organising further investment
- negotiating with banks
- negotiating the sale of the company to partners in the sector
Investing fund managers generally leave day-to-day operations and growth strategies to the company's senior management. They may, however, take a more hands-on role if there is a crisis, if the company is a start-up, or if the investment is a complex one, eg a debt-financed operation.
Company committees and boards
Most fund managers will expect to be present or be represented on a company's board, subject to normal corporate governance standards.
Financial board members are subject to their own professional codes of conduct, including those which cover conflicts of interest between different investments. Fund managers can also play an active role in important committees, eg for audit or remuneration.
Liability
A fund manager sitting on a company board has a duty of care to its shareholders and creditors. They will generally avoid involvement in day-to-day operations, as this will increase their liability should the company collapse.
Experienced fund managers should be able to identify signs of crisis in a company, such as a sharp rise in fixed costs or high staff turnover.
Exit strategies
Venture capital (VC) investors may decide to sell their investment and exit a company. Alternatively, the company's management can buy the investor out (known as a 'repurchase').
Other exit strategies for investors include:
- sale of equity to another investor - secondary purchase
- stock market floatation
- liquidation - involuntary exit
Private equity firms may decide to not sell all the shares they hold. In the case of a flotation, they are likely to hold the newly-quoted shares for at least a year.
The exit value of a company must be mutually agreed between all parties, and will depend on:
- the type of operation
- the number of shares sold
- the original valuation of the company
Private equity funds have either a limited lifespan - usually ten years - or they can continue to operate as long as they have capital to invest.
For further information see secure equity investment.
FAQs
Exit strategies
Venture capital (VC) investors may decide to sell their investment and exit a company. Alternatively, the company's management can buy the investor out (known as a 'repurchase'). Other exit strategies for investors include: sale of equity to another investor - secondary purchase.
What are the reasons why investors or venture capitalists exit from business or investment? ›
An exit plan may be used to:
- Close down a non-profitable business.
- Execute an investment or business venture when profit objectives are met.
- Close down a business in the event of a significant change in market conditions.
- Sell an investment or a company.
- Sell an unsuccessful company to limit losses.
Selling equity stake: Investors with shares in a startup or small company could exit by selling their equity stake in the business to other investors or a family member. Selling an equity stake may form part of a succession plan agreed upon by founders when starting a business.
In what ways do venture capitalists get involved with a company? ›
Venture capitalists: While also involved in the businesses they invest in, venture capitalists may not be as hands-on as angel investors. Their involvement is often through strategic advice and using their extensive networks for business growth, partnerships, and further funding.
What does a great exit look like for a venture capital fund? ›
Mergers and acquisitions (M&As) are the most typical way for venture-backed enterprises to leave. Companies constantly combine and acquire one another. Most VC exits (especially in recent years) are realized when portfolio companies are acquired by larger, often public, cash-rich companies.
Why is an exit strategy important for investors? ›
An exit strategy, often overlooked in the early stages, is a vital roadmap for the future. It's a crucial plan outlining how business owners intend to leave or transition out of their company, ensuring a smooth and profitable departure, safeguarding the company's future and providing financial security.
What is the most common exit strategy for venture capitalists? ›
Common Exit Strategies for Venture Investing
Initial Public Offering (IPO): An IPO is when a company sells shares of its stock to the public for the first time. This is typically the most lucrative exit strategy for investors, as it can lead to significant returns if the company's stock performs well.
Where do venture capitalists get their money? ›
The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards. This form of financing is distinct from traditional bank loans or public markets, focusing instead on long-term growth potential.
What is the exit value of a venture capital company? ›
The Exit Value (EV), or Terminal Value, is the value the company is expected to be sold for. In the Venture Capital method, this is usually calculated as a multiple of the company's revenues in the year of sale.
How to make an exit strategy? ›
To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Prepare your finances. ...
- Consider your options. ...
- Speak with your investors. ...
- Choose new leadership. ...
- Tell your employees. ...
- Inform your customers.
The most common way to repay investors is through dividends. Dividends are payments made to shareholders out of a company's profits. They can be paid out in cash or in shares of stock, and they're typically paid out on a quarterly basis. Another way to repay investors is through share repurchases.
What is an example of an exit strategy for a business plan? ›
The business plan needs to include alternative exit strategies. Examples include selling to family member(s), selling to partner(s), or liquidation. A typical business plan lays out a course of action to start a venture and keep it running. A comprehensive business plan also includes an exit strategy.
What do venture capitalists want in return? ›
VCs look for a competitive advantage in the market. They want their portfolio companies to be able to generate sales and profits before competitors enter the market and reduce profitability. The fewer direct competitors operating in the space, the better.
How do venture capitalists get their money back? ›
Although the venture capitalist may receive some return through dividends, their primary return on investment comes from capital gain when they eventually sell their shares in the company, typically three to seven years after the investment.
What is venture capital in simple words? ›
What is venture capital in simple words? Venture capital is money invested in a business, usually a start-up, that is seen as having strong growth potential. It is typically provided by investors who expect to receive a high return on their investment.
Which of the following are the exit strategies from a venture? ›
Common types of exit strategies include initial public offerings (IPO), strategic acquisitions, and management buyouts (MBO).
What is the exit time for venture capital? ›
Between 2005 and 2022, the average length of time between receiving an initial venture capital investment and the IPO of the respective company in the United States was 5.6 years. In 2022, VC-backed companies went public approximately 5.1 years after securing their first VC investment.
