I haven't written in this series in a long time, but one of my readers recently asked me to comment on the differences between exit strategies of VCs and Private Equity buyouts. Let me first say that VC firms and LBO shops differ in their strategy and culture.
Some venture firms are old school and want to create long term value while transforming the way the world works. Some venture firms are just about the exit and the ROI and really don't give a hoot about the business other than providing a nice return so they can go out and raise a bigger fund. Similarly, in the buyout world, you have old school corporate raiders in the style of Gordon Gekko that love to carve up companies for the value. You'll also find a lot of very conservative buyout guys that like to build businesses and create value for shareholders. Typically, they will provide a nice piece of equity infusion for the company to then acquire complementary businesses or fund new projects. As you can imagine, the lines may blur between conservative LBO investors and aggressive venture investors. Those venture investors that use debt offerings sure do look an awful lot like conservative growth equity LBO players.
In my opinion, the important difference between the VC and buyout in terms of exit strategy and liquidity is that while both of them have a clock ticking, there is a different expectation, urgency, and ultimate multiple goal between the two. A venture firm must provide returns to its investors and has a long horizon to do so. Therefore, it has to make a high multiple on its investment and must hold out for a nice acquisition or an IPO. So it must build the business from scratch to be able to carrry a very high enterprise value.
On the other hand, a buyout firm, while it does have investors to report to, uses leverage for its transaction so it must pay off its lenders and service debt. Thus buyouts are bank driven deals. A bank won't lend a venture fund money to invest in a startup because it knows that it will probably go down in flames. A bank will lend a buyout fund money because there is collateral in place, and that collateral comes in the form of a company's cash flow and assets. So a buyout fund will seek companies that are undervalued with high predictable cash flow and operating inefficiencies. If it can improve the business, it can sell the company or its parts, or it can pay itself a nice dividend or pay down some company debt to deleverage.
The essential difference is that the venture funded company has little to no debt because it has issued equity. The buyout funded company has issued equity and loaded on debt.
As for the actual exit, a venture fund will usually go for the IPO or acquisition. The highest valuation will usually be what is available on the open market and that is why a venture fund will try that route first. A buyout fund will go for either of those but it also has the option of paying itself out some cash or of selling off parts or of selling in a secondary buyout to another firm.
I hope that answers some questions and feel free to ping me any questions.
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