Definition of Exit
What is an "exit" as it applies to the business world? What does the term "exit" mean?
An "exit" occurs when an investor decides to get rid of their stake in a company. If an investor "exits", then they will either have a profit or a loss (they are obviously hoping for a profit).
Example: A venture capital firm decides to invest $40 million in a startup. In return, they receive a 10% stake in the company. This would value the company at $400 million.
In order to make a successful "exit", the venture capital firm hopes that the company either:
a) goes public
b) is acquired by another firm
For instance, let's say that the startup is acquired by another firm for $800 million. Since the venture capital firm's investment valued the company at $400 million, the firm will receive a tidy 100% return on their investment (they will be paid $80 million by the acquiring company for their stake).
Also, if the startup eventually goes public, then the venture capital firm can "exit" their stake by selling their shares on the open market.
Of course, in both situations, the venture capital firm could incur a loss (if the firm was sold for less than $400 million, for instance).
If the venture capital firm decides to sell at a loss, then they are still making an "exit", just not a successful one.
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