Generally speaking, VC's aren't interested in getting their money back with revenues from the company they're funding. They aim for a 'big exit', in the form of an IPO or acquisition by another company.
>VCs need an exit to get a return. If not an IPO, then an acquisition. Unless of course the company becomes insanely profitable and can buy out their investors at a nice multiple.
In addition, the exit must occur within the maturity term of the VC's fund.
Interesting. Totally makes sense when you think about it. Asset allocation among the LP set tends to be backward-looking, so if we believe exiting via IPO = high fund IRR, we should expect fund flows into VC. Similarly if we assume that M&A exits are less profitable (especially, less likely to move the needle on a particular fund's IRR) we should expect to see pressure on the VC to reinvest that capital and take another swing of the bat.
Startups aren't completely independent of the market. They either seek to IPO or be acquired by a company. Both of these possibilities are highly dependent on the availability of excess capital. When the market goes down, acquirers & potential IPO purchasers have less capital.
This doesn't mean it affects an entrepreneurs day-to-day life, nor should it. But, VCs by definition invest until they can get an exit. If the IPO and M&A market dries up, it is harder for them to get an exit, and thus they are less likely to invest.
Companies with VC money have to be acquired - by another company or the public (via IPO). The VCs must have their exit - their funds are not for long term investment.
you need to think 2nd order effects: VCs need mega exits to make returns, which usually are blockbuster IPOs. Higher rates will crash quite a lot of high-growth stocks making IPOs less appealing for investors, which messes up with A16z business model of exiting via IPOs.
Right, but most VC's want an exit, acquisition or IPO. They are not in it for the next 20 years or so. They are waiting for the right market conditions. Which happens when the public really buys the hype and will spend their money buying up stocks after IPO. They can't go public preemptively.
I don't know what you think "the market" is, but VC investment is part of it.
Perhaps you're confusing the market with the "public market", publicly held companies? But the private market is very much part of the market. Nobody's leaving money on the table, that doesn't even make any sense.
How does this help the VCs liquidate?; i.e. if the IPO market got killed in favor of such deals, wouldn't that discourage venture capitalists from making investments?
Most limited partners who give their money to VCs are university endowments and pension funds. If you're the manager of a pension fund, you want cash back once the fund shuts down, you certainly don't want a piece of paper saying you own X number of shares in a company.
I don't know the details of this deal, but suffice to say, the VCs already know what their exit plan is.
I know in the biotech space there is a trend towards exits other than acquisitions or IPOs. You basically create LLCs and any returns are funnel back through to shareholders (through dividends??).
VCs don't make all their money from exits. A lot comes from fund management fees. Investing (someone else's) money in a business and then charging 5% from managing that investment is quite lucrative when the values are high enough.
That is a common misconception, but it's usually founders who are eager to sell, not VCs. There is a power law distribution of outcomes in startups. The big successes are so big that that's where all the returns are for investors.
VCs routinely reject startups because they worry that the founders are only interested in selling the company. We tell founders who are about to present to VCs never even to use the word "exit."
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