Abstract
The key characteristic of private equity finance is that investors hold their investments only for a limited period of time. The key goal of VC funds is to grow the company to a point where it can be sold at a price that far exceeds the amount of capital invested. This process is called an exit or divestment. There are three basic types of exits: going public, being acquired by a larger corporation, a sale to a third-party investor.It is a widely believed and accepted proposition in private equity literature that the initial public offering of a private equity portfolio company is the most successful and profitable exit opportunity. However, according to the few sources of literature, public offerings are not the preferred divestment type for venture capital firms. Going public is one of the most critical decisions in the lifecycle of a firm. This is not easy, as the process is very comprehensive and complex. Hence, a lot of considerations should be taken into account. Because every investee firm is different, a development plan to achieve a successful exit takes into consideration a number of macroeconomic and microeconomic factors. Moreover, several advantages and disadvantages of exit through an IPO could be indicated. The objective of this paper is to show the success and profitability of going public by VC funds. The VC’s exit type as a way of cashing out on its investment in a portfolio company is a consequence of the exit strategy, which means the plan for generating profits for owners and investors of a company. While an IPO is the most spectacular and visible form of exit, it is not the most common one, as historically in the US it was, but still in Europe it has not been yet. There will be both literature and statistical data coming from different studies and reports used in this research.
Highlights
The key goal o f venture capital (VC) funds is to grow the company to a point where it can be sold at a price that far exceeds the am ount o f capital invested
The National Venture Capital Association (NVCA) uses in its reports the following definition[8]: Private Equity = Venture Capital + Buyout/Mezzanine In this sense, venture capital is regarded as a subset o f private equity, referring more to investments made during the launch stages o f a business
VCs will exit from an investment when the projected marginal value added as a result o f the VCs’ efforts, at any given measurement interval, is less than the projected cost 10
Summary
The key goal o f VC funds is to grow the company to a point where it can be sold at a price that far exceeds the am ount o f capital invested. A venture capitalist must liquidate the investment and distribute proceeds to investors within the predefined time of the fund. As the process o f private equity investment consists of three main stages: fund-raising, investing and exiting, w hich are interrelated, the reverse m echanism is observed. This means that the exit stage has a feedback effect on the fund-raising and investing phases[3]. The institutional investors reinvest the earnings into the new funds and the process begins anew It is a widely believed and accepted proposition in private equity literature that an initial public offering o f a private equity portfolio company is the m ost successful and profitable exit opportunity[4]. Venture Capital and Private Equity: A Review an d Synthesis, “Journal of Business Finance & Accounting”, June/July 1998, Vol 25, Issue 5 -6 , pp. 521-570
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