Harvesting Strategies

Introduction

Venture capitalists usually first learn about a potential new-company investment opportunity by reading its business plan. One of the first items they will look for in the plan is the harvest strategy, which is also called the exit strategy or liquidity event. The harvest strategy describes the investors' first opportunity to trade their shares in the firm for cash.

Purpose

The purpose of the harvest strategy is to allow for equity investors to be repaid. Before making their investment, they will need to know the method of repayment and how long they will have to wait. The waiting period is normally three to five years. The actual length of time depends on the complexity of the company and the nature of its industry.

Types

1. Feed It to the Chipper

In the worst case, the company will be broken into pieces and fed to the liquidators as so many chums. This path is dictated by poor financial performance, lack of a viable market for either the company or its products or the impatience of the investors to continue funding a dry hole.

2. Owner Buyout

In many cases, the founder or the employees will have an intense desire to keep their jobs. This scenario assumes a well-performing company that is generating positive cash flow and profits. An agreement is struck with the investors, stockholders or lien holders establishing the value of the company. The employee group will find a way to finance the amount necessary to buy out the interest of the others, thus taking control of the company away from potentially hostile forces.

3. Sell the Company

This exit strategy is just as it seems. From inception, you build sales and brand value to get the attention of potential suitors. You may have predetermined a level of profit at which you begin to market the company. You may have done such a good job of building a brand that a competitor or conglomerate will see your company as a good fit to its long-term strategy. This option often results in dismissal of most management in the target company and some consolidation in the ranks.

4. Go Public

The most complex exit strategy is jumping into the morass of regulations managed by the Securities and Exchange Commission. Go for the public offer through SEBI in India. The business plan should be specific about the type of harvest strategy that will enable the investors to receive their repayment. The two primary methods are the initial public offering, or IPO, and sale to another company. With an IPO, the investors might see a dramatic rise in the value of their shares. The company will then be a public company, so will have to operate under more regulations. With a sale to another company, the share price would be negotiated.