Exit Scenarios

Different exit scenarios in the venture industry.

Exit-strategies can be divided in two categories: Merger & acquisition strategies and going-public strategies. Within the merger & acquisition strategies, three groups are of interest: the management, financial investors and strategic investors. Going-public strategies include the traditional IPO, direct listing and utilization of a SPAC. Both exit strategies from two categories offer different pros and cons for founders and active investors.

1. Merger & Acquisition

1.1 Management Buy Out

Strategy: Founders, respectively the management, buy back shares to regain or maintain the independence of the company.

Potentially necessary to prevent strategic investors from unwanted takeovers.

Previous founders might have difficulties to raise enough funds to buy back the entire company.

Founder

Active investor

Company is saved and control regained

Fast and easy way to generate liquidity without extensive regulations

Elaborate raising of funds difficult and unusual

Does not generate maximum return

1.2 Secondary Purchase

Strategy: Primary and currently active investor sells company shares to a new, secondary investor.

Primary investor sells company to a second investor when they want to separate themselves from the company or the second investor offers better benefits.

A secondary purchase allows for smaller long-time investors to sell their shares, thereby minimizing the cap table.

Founder

Active investor

Great alternative to sustain the company when no other exit opportunity is available

Simple and cost-effective option to generate return and get rid of company

Necessary evil to sustain the company with loss of independence

Does not generate maximum return

1.3 Trade Sale

Strategy: The company merges with or is acquired by a second company.

Investor of interest is not a financial investor but instead an industrial investor with strategic interests in the company.

The industrial investor provides valuable knowhow, network and existing structures.

Founder

Active investor

Strategic interests and fit can further accelerate growth

Strategic interests can increase valuation

Merging with bigger company leads to loss of control over own company

Trade sale as a merger relates to potentially higher risk

2. Going Public

2.1 Typical IPO

Strategy: Initial public offering of new company shares/stocks on the organized capital market with the help of an underwriting financial institution to raise capital.

The process:

  1. First orientation and selection of underwriter
  2. Different due diligences and regulatory filings for approval
  3. Road show to meet and convince potential investors
  4. Price discovery process using different procedures
  5. Final IPO and transaction process

Founder

Active investor

Proven way to raise capital and gain brand recognition

Opportunity to generate high return and leave the company

High transparency requirements and logistical requirements

High transparency requirements and logistical requirements

2.2 Direct Listing

Strategy: The company directly sells already existing shares itself without the assistance of underwriters. Raising capital is not the focus, but instead other benefits of being publicly traded.

Founders, invested venture capitalists, vested employees and other investors sell their own shares.

Pricing issues of traditional IPOs due to underpricing of the IPO by the underwriting investment banks are bypassed.

Founder

Active investor

Cheaper and faster than typical IPO without lock-up period

Fast and easy way to generate liquidity without extensive regulations and lock-up period

Due to no new shares being sold in the direct listing, less capital is raised compared to IPO

Initial trading of company shares more volatile due to missing price discovery process

2.3 SPAC

Strategy: Company is acquired by listed special purpose acquisition company (SPAC), which is financed by investors. Both merge to one publicly listed company.

Sponsors invest in SPAC which raises additional money by going public. Once public, the SPAC targets and acquires a company which must be approved by the sponsors.

Utilizing a SPAC to go public is faster than a traditional IPO and associated with less effort.

Founder

Active investor

Quick and easy exit strategy with simpler regulatory requirements

Fast and easy way to generate liquidity without extensive regulations

Own company must be targeted by SPAC

Increasing regulations and high volatility due to bad SPAC performance

At Trustventure, we advise young companies on financial issues and offer CFO-As-A-Service. Our expertise in questions of corporate finance, planning and controlling creates transparency and security for you and your investors. Reach out to us via our contact form or write to us directly at office@trustventure.de.

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