VentureCapital #Investing #StartupFinancing
Hey there! Let me break down how VC firms make money even if a business doesn’t go public or get sold. It’s all about strategy and diversification, so buckle up for a fascinating journey through the world of venture capital!
Diversification is Key
When VC firms invest in startups, they typically create a diversified portfolio. This means they spread their investments across multiple companies, knowing that some will fail, some will break even, and others will be the big winners. 🚀
Returns from Acquisitions
If a startup doesn’t go public but gets acquired by another company, VC firms can see a healthy return on their investment. This is why they carefully choose companies with potential to be attractive acquisition targets.
Secondary Markets
In some cases, VC firms can sell their shares in secondary markets to other investors. This allows them to cash out and realize profits even if the company stays private.
Dividends and Buybacks
Some startups that are profitable may choose to distribute dividends to their investors, including VC firms. Additionally, the company can buy back shares from investors, providing them a way to exit with a return.
Example: The Case of the $30m ARR Startup
Let’s say a startup is making $30 million in annual recurring revenue (ARR) with minimal growth. If the company is not attractive for acquisition or an IPO, VC investors may explore different options.
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Patience and Long-Term Play: VCs can choose to hold onto their stakes in the hope that the company will increase its value over time, leading to a more lucrative exit.
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Exploring Other Revenue Streams: The startup could explore diversifying its revenue streams or expanding into new markets to boost growth and potentially attract buyers in the future.
- Negotiate Buyback or Dividends: VCs can negotiate with the company for a buyback of their shares or push for dividends as a way to generate returns on their investment.
In conclusion, VC firms have various strategies to make money even if a startup doesn’t IPO or get sold. By diversifying their portfolio, exploring different exit strategies, and being patient, they can still see a return on their investments. It’s all about playing the long game in the ever-evolving world of startups and venture capital! 💸
I hope this helps shed some light on how VC firms navigate these complex scenarios! Let me know if you have any more questions.
First they can pay dividends to their owners, one of which would be the VC company. This only lasts so long though.
But most likely, they will find a way to sell their shares–some way to do it, whatever they need to do to get out. This may be to another investment firm, or private investor, or even they may sell it back to the company itself, or perhaps other owners of the company want to acquire their shares for any reason. Maybe one owner has 40% of shares and the VC has 15%, thats a mighty juicy buy for someone become majority owner.
Sometimes VCs have triggers than can force the company to buy back their shares, but I don’t know how common that is.
Well, “stays private and mildly profitable” is a type of failure in the VC space. The VC pushes the founder to make some real money or buy the VC out. Buying the VC out makes them a little money, going broke trying loses them all their money and you’ve already explained the occasional big winner.
In the case that you mention, the company has value and someone will buy it from them. The buyer will typically be a larger company in the space, private equity or more frequently than you think, founders will buy out the VC’s equity.
It’s a numbers game, say you have a bucket of 10 companies in a VC portfolio, 1-2 maybe a “hit” which typically takes 7-10 years, but offer a 100X type return, 2-3 which “return capital” so you get back whats invested and 5 which go belly up. But for those 2 which are hits, they effectively return the profits to investors, it’s a high risk game where “limited partners” the groups that invest in VC’s typically invest in many VC’s in many sectors to diversify the risk.