This is the fifth in a series of articles.  This was published in Venture Capital Focus magazine in May 2003.

There Must Be Some Way Outta Here

This article is about exits.  What venture capitalists mean by this is the way they can make money out of an investment.  To put this in perspective you need to realize that VCs provide money to companies by becoming shareholders in it.  They do not have collateral, do not get interest, and do not even have any right to repayment.  They provide cash to a company in return for shares.  The only way a VC makes money is by selling those shares again at a later stage.  Below we discuss how this can be done.

Buy back

This is the approach that most entrepreneurs think of first.  In reality, it rarely happens.  The reason is that the wealth of the entrepreneur is locked up in the company too.  He may be rich on paper, but will not usually be able to buy out a VC's shares for cash out of his own pocket.  Another option may then be to let the company repurchase its shares from the VC.  This, however, is subject to stringent conditions in the Companies Act.  Even if those conditions are met, most companies cannot maintain growth while shrinking their capital base.  In practice, therefore, buy backs are the least likely exit route.

Strategic sale

This is the type of exit that happens most often.  The VC and the entrepreneur try to find another company that has an interest to take over shares from the VC, and perhaps from the entrepreneur as well.  The best candidates for this are usually foreign companies that want to enter the market or establish a base in Trinidad.  Instead of doing this on their own they may be better off by partnering with an existing company.  The foreign partner may then take a stake in the company to advance its own international expansion strategy, and will help the company to grow further.

Private placement

This route is sometimes used.  It means the VC sells its shares in a company to one or more other investors.  These are usually large institutions or even another venture capital or private equity fund.  From the company's perspective it is not usually a final exit, because those other investors may eventually want an exit too.  The VC may choose to use this route if other exit opportunities are not available or are taking too long to realize.

IPO

This is seen by some as the holy grail of venture capital investing.  It means doing an Initial Public Offering of the company's shares on a stock exchange.  This scenario allows the company to raise money from the public, for example to finance further expansion.  At the same time it allows the VC to sell shares, and creates a liquid market for remaining shareholders too.  That's why an IPO may create the most benefits for the largest number of parties.  It must be realised, however, that many companies may not be large enough, attractive enough, or mature enough to become public.  Only a few companies are likely to reach a stage where this is possible.

How to get what you're worth

It should be clear by now that there is more than one way out of a company.  The goal of VCs is very simple: they want to get the highest price for their shares.  Except in the case of a buy back, this goal benefits the entrepreneur too.  The company, the VC and the entrepreneur should work together to find as many exit opportunities as possible.  You do need to choose an exit eventually.  It is best to create as many options as you can, so when the time is right you can choose the exit with the highest value.

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