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Venture capital ("VC") investments are risk capital investments made in venture companies ("VCs") with high growth potential that face challenges in accessing financing due to their early-stage nature. VCs are defined as businesses capable of developing innovative products or services, typically technology-oriented, rapidly scalable and carrying high levels of risk. For such companies, VC investments are considered a critical resource for growth and sustainability, offering not only financial support but also strategic guidance, management expertise and access to an extensive business network.
From the perspective of investors, the most critical aspect of VC investments is the method and conditions under which the investment can be recovered, in other words, liquidated. In this respect, the exit process from VC investments holds strategic importance for both VCs and investors.
Common Exit Methods
Exit from VC investments may be realized either fully or partially. The most common strategies for exit are as follows:
- Exit through Share Sale
- Exit through Initial Public Offering ("IPO")
- Buyback Agreements
- Private Equity ("PE") Buyout
- Exit through Share Sale
Among exit strategies from VC investments, share sale is the most widely used method. Through this method, the investor may exit by transferring its shares to a strategic buyer (strategic sale) or by selling to another financial investor (share sale). A strategic sale refers to the acquisition of the VCs by another larger company or the investor's exit from the partnership through a merger. In such transactions, investors are generally granted drag-along and tag-along rights. The drag-along right enables the investor to compel other shareholders to sell their shares to a strategic buyer, while the tag-along right allows the investor to sell its shares under the same conditions when other shareholders dispose of their shares.
A share sale may also be carried out through financial sale or secondary sale. In this method, the investor transfers its shares to another financial investor or another investor active in the VC market such as VC, PE, wealth fund. Accordingly, the investor may liquidate its investment without an IPO or a full company sale. Secondary sales offer a practical alternative, particularly where the VCs has not yet reached the maturity required for an IPO or where an agreement with a strategic buyer cannot be achieved.
- Exit through Initial Public Offering
Among exit strategies, IPO is one of the most prestigious methods with high potential for value creation, whereby the shares of the VCs are offered to the public. Under Turkish law, IPOs are regulated within the framework of the Capital Markets Law No. 6362 (the "CML") and secondary regulations of the Capital Markets Board. Pursuant to the CML, an IPO is defined as "a general call made through any means for the purchase of capital market instruments and the subsequent sale carried out in response to such call."
An IPO signifies that the VCs has reached a certain size and level of corporate governance, providing investors with significant liquidity opportunities. Through this method, the investor may offer its shares in the VCs to a broad investor base in the stock exchange, while the VCs can also benefit from a relatively low-cost financing source.
However, despite its advantages, an IPO also carries certain disadvantages. Although existing investors may maintain a degree of control over the VCs, the regulatory obligations and financial reporting requirements that arise during and following the IPO process impose additional costs and responsibilities on the VCs.
- Buyback Agreements
Within the framework of shareholders' agreements, it is possible to establish options granting either the investor or the entrepreneur the right to sell or purchase shares under certain conditions. Buyback agreements structured within this framework may provide the investor with the right to sell its shares back to the entrepreneur at a certain date, or conversely, grant the entrepreneur the right to repurchase the investor's shares at the same date.
Such options provide flexibility for the parties, thereby diversifying exit strategies. For the investor, they create an opportunity to convert the investment into cash within a defined period, while for the entrepreneur, they provide a mechanism to regain control over the VCs. Particularly in early-stage investments, including buyback options in the agreement is considered a crucial tool to strengthen trust and cooperation between the parties. These provisions not only expand the investor's exit alternatives but also enable the entrepreneur to restructure the VCs's capital composition in its favor in the future.
- Private Equity Buyout
PE buyouts constitute a later-stage exit strategy, whereby a PE fund acquires all or a significant portion of the shares of VC investor(s). This route typically becomes available once the VCs has demonstrated a product–market fit and a sustainable, revenue-generating model. For investors, a PE buyout enables realization of returns without the listing obligations and costs of an IPO and may be structured as a full exit or a partial exit with a minority rollover.
From the VC's perspective, a PE buyout can support a new growth phase by introducing larger pools of capital and operational expertise, often accompanied by value-creation plans and strengthened corporate governance. In practice, PE-led exits complement strategic sales and secondary sales, expanding the spectrum of viable exit strategies.
Role and Importance of the Shareholders' Agreement in Venture Capital Investments
In VC investments, the shareholders' agreement executed between the investor and the existing shareholders of the VCs is one of the fundamental legal instruments ensuring the protection of the investment and safeguarding the rights of the parties. Many provisions and arrangements regarding the exit mechanisms explained above are also included in such agreements.
The shareholders' agreement aims to prevent potential conflicts of interest among the shareholders during the investment period and to regulate the partnership relationship with clear rules. Primarily, it contains provisions safeguarding the investor's capital contribution to the VCs. Provisions concerning the investor's information and audit rights, representation on the board of directors and veto rights for certain strategic decisions enable the investor to hold an effective position in the VCs' strategic management. This ensures that the investor maintains oversight and control over its investment.
Finally, the agreement includes provisions concerning the resolution of disputes that may arise between the investor and the entrepreneur. Mechanisms such as arbitration clauses, mandatory negotiation requirements, or independent mediation aim to ensure the swift and efficient resolution of disputes. This reduces uncertainties during the investment period and establishes a cooperative relationship between the parties based on trust.
Conclusion
The success of VC investments depends not only on the growth performance of venture companies but also on the planned and efficient execution of an exit strategy. In this context, IPOs, share sales and buyback agreements stand out among the methods available to investors. Each method offers different opportunities for the investor, while also directly relating to the sustainability and long-term value creation objectives of the VCs.
Therefore, it is of critical importance that investors design their exit plans properly, act accordingly and secure such plans under shareholders' agreements. This approach establishes the foundation of a reliable and sustainable structure within the VC ecosystem.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
