Definition
The term exit strategy refers to a process by which an owner plans to withdraw their investment in a business. Exit strategies are important to venture capitalists, since extracting their money from a business allows them to reinvest those funds elsewhere.
Explanation
Also referred to as cashing out an investment, an exit strategy is used by an owner, or venture capitalist, to extract the funds they have invested in a business. They are then able to put their money back to work in a new venture, with the objective of generating even more profits.
Since venture capitalists typically invest their money in a privately-held company, it's important for them to have a clear path to exit the business. If an existing business is successful, and its market value increases, a venture capitalist will want to cash out their position and reinvest those funds in a new growth opportunity. For this reason, the investor will want to understand the exit strategy before becoming part owner in a business. Frequently cited examples of exit strategies include an initial public offering (IPO) or the sale of a business to an established, and much larger, competitor.
Related Terms
The term harvest strategy refers to the planned discontinuation of new investments in a line of business or product so the maximum profits can be extracted from it. Harvest strategies are oftentimes used when a product is nearing the end of its lifecycle, or the usefulness of a service is nearly over.
Moneyzine EditorJanuary 19th, 2024
The term Halloween strategy refers to the selling of stock before May and not investing in equities again until the end of October. The Halloween strategy is based on a theory that the months of November through April provide investors with stronger capital gains than the remainder of the year.Moneyzine EditorJanuary 19th, 2024
The term fixed income strategy refers to several options an investor has when purchasing securities such as bonds. The three primary fixed income strategies include ladders, barbells, and bullets.Moneyzine EditorJanuary 18th, 2024
The term event-driven strategy refers to an investment approach that attempts to exploit pricing inefficiencies that occur after significant corporate announcements. Event-driven strategies are used by large institutional investors when a company notifies the public of plans that will impact their future earnings potential.Moneyzine EditorJanuary 17th, 2024
The term bullet strategy refers to an investment approach involving the purchase of fixed income securities that mature in the same timeframe. The bullet strategy is oftentimes used by investors that need funds on a certain date.Moneyzine EditorJanuary 9th, 2024
The term bond ladder refers to an investment strategy involving the purchase of fixed income securities with staggered maturity dates. The bond ladder strategy helps investors to manage interest rate risk and provides them with the opportunity to make a series of reinvestment decisions over time.Moneyzine EditorJanuary 9th, 2024
The term barbell strategy refers to an investment approach involving the purchase of fixed income securities with both long and short term maturities. The barbell strategy typically applies to bonds, and is thought to provide the investor with a portfolio that balances risk and reward.Moneyzine EditorJanuary 8th, 2024
