Introduction

This chapter probes in detail the final phase in the venture capital (VC) firms’ lifecycle, namely exit from the funded investee companies. The term exit refers to the divestment of the company from the VC firms’ portfolio (Schwienbacher 2009). As there are no other avenues for disposing of the VC firms’ stake in the investee ventures and since the VC-backed companies do not pay out any dividends, exit is the only way for a VC firm to redeem its return on investment (Schwienbacher 2009). Therefore, the exits are as important as the entry decisions themselves. Moreover, exit is also a signal of the quality of the concerned VC firm, which is crucial for follow-up fund-raising. Thus, any study pertaining to VC investments cannot be deemed to be complete unless we have analysed the last crucial stage in the lifecycle, that is, exit from funded ventures.

Although, there are several interesting issues that can be analysed in the context of VC exits, our focus is on understanding the determinants of successful exits in the face of huge agency risks encountered by the investing VC firms. In this study on VC exits, the primary unit of analysis is the individual VC firm. Thus, the incidence of successful exits has also been analysed at the VC firm level.

It is a well-documented fact that VC firms exit the investee companies using one of the following five exit routes: initial public offering, or IPO (stock market listing of the funded company), strategic sale (merger and acquisition [M&A] of the funded company with a strategic partner based on mutual synergies of the participating businesses), re-financing (selling off its own stake to another upstream VC firm), re-purchase (purchase of the VC firms’ stake by the firm founders), and write-offs (company files for bankruptcy). IPO is regarded as the most profitable exit route, with an internal rate of return (IRR) of 80 per cent, followed by M&A (Cochrane 2005). The rates of return are comparatively much lower for two other exit types, namely re-finance and re-purchase. Write-offs yield negative returns. In our analysis, we do not intend to look into the individual rates of return from these different exit routes.