Venture capital firms typically exit their investments through a variety of means, such as an initial public offering (IPO), acquisition, or merger.
An IPO is when a privately-held company offers shares of stock to the public for the first time. This allows the venture capital firm to sell its shares in the company, and potentially make a significant return on its investment. However, the process of going public can be long and complex, and there is no guarantee that the stock will perform well once it starts trading.
An acquisition or merger occurs when another company buys the venture-backed company. The acquirer will often pay a premium for the company, which can provide a significant return for the venture capital firm. Additionally, the venture capital firm may retain a portion of the acquired company's stock.
Another exit strategy is recapitalization (Recap), it’s similar to a merger or acquisition, but it is achieved by bringing in a new investor, typically a private equity firm, in exchange for a large portion of the venture-backed company's stock. This also allows the original venture capital firm to cash out some of its investment and potentially make a significant return.
Finally, a secondary sale is when a venture capitalist sells its shares in a company to another investor, typically a late-stage venture firm or a private equity firm. This allows the original venture capitalist to cash out some of its investment, and the late-stage investor to gain exposure to the company before it exits through an IPO or acquisition.
Also, in some cases, they venture capital firm may hold their shares in the business beyond the IPO.
In general, it's important to remember that not all venture capital investments result in a successful exit, and some investments may not return the capital that was initially invested.