What Does Monetization Mean?
Monetization refers to the conversion of an investment into cash, which usually happens via a liquidity event. When investors, such as venture capital or private equity firms, invest in a private company, they expect to get their money back plus a specified return within a certain period of time. The investee may flow some cash out via dividends, but the primary way in which the investors realize their return is by monetizing their investment though a sale. Monetization can occur in several ways, but the more common ones include selling to or merging with another company, or taking the company public via an initial public offering (IPO).
Divestopedia Explains Monetization
Private company owners usually create value in their companies by re-investing profits back into the business. Usually, bonuses are declared at year-end, but the cash is left in the company through a shareholder loan. The only way then to monetize some of these retained earnings is through a company sale. Some cash can be paid out of the business through dividends, but this is uncommon in capital intensive companies that continually require re-investment. Private company owners monetize once when they sell to a corporate buyer, but can monetize twice if they sell to a financial buyer. The first monetization happens when the business is first sold, and the second when the financial buyer exits the business if the seller retained some equity in the business.