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.
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.