

Ask HN: Do VCs make money if a company doesn't go public? - pgcosta


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BillSaysThis
Presumably you meant to ask "Do VCs make money directly if a company doesn't
go public or get acquired?"

Investors make money if they sell their stock (or other instruments) for more
than the purchase price. Without and IPO or M&A, how would this happen?

I included directly because sometimes the investment doesn't go well itself
but results in a subsequent investment (e.g., the same founders or other
employees start another company or the VC makes a connection that leads to a
Whatsapp situation).

Sometimes companies will be pushed into deals that don't really make a profit
but at least get the VCs a longer ride. Years ago I was at a startup that had
taken $7M but never got to real revenues; the VCs instigated a sale of the
company to a very large, already public company that essentially returned the
$7M to them. Today we'd have probably called that an aqui-hire since the buyer
took only the engineering team and laid off the rest. But the VC got their
cash to invest again and perhaps more importantly the partner on our board got
his time back to invest elsewhere.

Another startup I was at only took angel money, about $2M, but literally never
took in a penny, and we simply shut the company down--I had to get rid of the
office furniture--although the two main investors sold the intellectual
property to another startup for stock.

But short of an IPO or big money acquisition, I don't see how a VC makes money
directly.

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tesseract
> Investors make money if they sell their stock (or other instruments) for
> more than the purchase price. Without and IPO or M&A, how would this happen?

Investors also make money from dividends. They are the traditional way an
owner of a privately held company would see a return on their investment. A VC
may not want to hold shares in a mature, dividend paying company because they
don't fit the VC's investment profile, but an IPO is in theory not the only
possible exit. The VC could sell its shares to a non-VC private equity firm,
for instance. Or a sufficiently successful company could buy back its stock
that is held by the VC. In practice I am not sure how often this happens - it
definitely doesn't seem common.

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deeths
(assuming you mean "go public or get acquired")

In some cases, a subsequent investment round will buy out the VCs (and/or
founders) by buying some or all of their stock.

A few typical situations where this could happen: 1) a particularly interested
investor (often a company in a similar space) is willing to pay a premium on
the price they'd get elsewhere to align strategically or make sure a supplier
or partner stays in business. 2) The VCs sell the stock to later-stage VCs or
private equity. This can happen if the needs of the company/founders and VCs
don't align. For instance the early VCs want to get out because they prefer to
invest in quick hits and don't want to keep their attention on the company for
the long-term, so they sell the stock to someone that's willing to take years
(and the resultant risk) for a pay out. 3) The founders or the company itself
buys out the VCs. Typically this would happen for situations where there's a
different vision for the company, for instance the founders want to turn it
into a lifestyle business, or a case like #2 where the VCs are losing
patience. If the company buys the shares, it has them to distributed to new
employees or to limit the number of outstanding shares and therefore increase
the price per share.

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schmidtc
Checkout Venture Deals by B. Feld and J. Mendelson. It gives a great overview
of how the VC world works and how VC's make their money.

VC's get paid through management fees. They get paid regardless of outcome,
but their careers last longer if they are successful.

[http://www.amazon.com/exec/obidos/ASIN/0470929820/domofa-20](http://www.amazon.com/exec/obidos/ASIN/0470929820/domofa-20)

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S4M
Even if the company doesn't go public, it can give dividends to its
shareholders, which is how VCs could make money from a company that becomes
profitable but doesn't IPO or get acquired. That said, I'd expect the dividend
money to be much smaller than the IPO money.

