A venture capitalist (VC) finances high-growth start-ups through an ownership stake or related financial claim. VC-backed companies pursue rapid growth and usually target an acquisition or IPO rather than slow, dividend-funded expansion. section 12.2.1 section 12.4
Understand the investment relationship through four practical dimensions:
- Risk and timing: VC investments are typically illiquid for years, while start-up failure means successful investments must potentially compensate for many losses. section 12.1.4
- Company stage: pre-seed and seed funding develop an MVP and product; Series A and B support customers and expansion; Series C commonly prepares for an exit. section 12.4
- Access and economics: prominent VC funds primarily serve institutional investors and wealthy individuals, commonly charging about 2% annually plus 20% of profits as carry. section 12.2.1
- Ownership changes: each funding round adds shares and reduces existing ownership percentages through dilution. section 12.4
A simplified fund return
Suppose an investment generates $100,000 in profit. A 20% carry allocates $20,000 to the VC, leaving $80,000 for the investor before the initial investment and annual management fees are accounted for. section 12.2.1
Table 12.1 Types of exits (successful and unsuccessful)
|
Exit
|
Reference scenario
|
Returns
|
|---|---|---|
|
IPO
|
Company A is a Series C company. After long talks and planning with investment bankers, they finally announce their IPO. After the IPO, an investor can trade his ownership on the stock market.
|
High
|
|
Acquisition
|
Company B is sold to an industry giant for billions. Direct investors are paid out and make a huge profit. Limited partners (LPs) get their profits minus carry fee and their initial investment paid out.
|
High
|
|
Fire sale
|
Company C is a company in distress but can sell itself to another company. Unlike a successful acquisition, in a fire sale, the buyer’s investment is largely to pay off debts. The investors won’t receive their full investment back.
|
Partial
|
|
Shutdown
|
Company D is a company in distress but shut down. Unlike in the fire sale, no company wants to acquire the company. Maybe some equipment, such as computers and office equipment, can be liquidated, but investors will likely not receive any money.
|
None
|
Compare IPOs, acquisitions, fire sales, and shutdowns by outcome and investor return; not every exit is successful. section 12.1.4
