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ACCA Applied Skills · Financial Management · Finance for small- and medium-sized entities (SMEs)

A venture capital firm invests in a growing unquoted company. Which of the following is the venture capitalist's most usual way of realising its investment?

Venture capitalists usually take an equity stake for a limited period and realise their gain through an exit, most commonly a trade sale to another company or a flotation of the shares. They do not rely on indefinite fixed dividends.

  1. AReceiving large fixed annual dividends indefinitely
  2. BExiting through a trade sale or a flotation of the company's sharesCorrect
  3. CRequiring the company to repay the investment as a bank-style overdraft
  4. DConverting its shares into government grants

Explanation

Venture capitalists typically take an equity stake for a limited period, usually several years, and need an exit route to realise gains. Common exits are a trade sale, flotation or a share buy-back. Indefinite dividends are not typical, as investee companies usually reinvest profits for growth.

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