How do you structure exits and returns for your investments?

IPOs are almost always the preferred route. An acquisition can be great for the founders and the company, but may not generate high enough returns for the fund. Sometimes, parallel sales and fund raises can be carried out. If the next round will come primarily from outside investors, this can be a way to establish a valuation, if this is proving difficult. This also means the portfolio companies should be keeping potential acquirers/competitors somewhat in the loop on progress.

Ideally all VC Investors look for IPO as an EXIT option as it delivers BIG returns like 50-1000X. But only few startups reach to that scale. Acquisitions and secondary sales are more common in early stage startups as late round investors look for high ownership and various corporates like Reliance, Tata, Big Startups etc acquire startups for inorganic growth.

This depends on the stage of entry. An IPO might take a decade and early or seed stage investors may not have the appetite for such a lengthy investment. Many early investors actually exit during subsequent rounds (Series A through C/D). In fact, many growth stage investors will want to streamline the cap table and take out small early stage investors! This might even be a condition of the investment.

This may sound shocking but we do not chase returns. In our experience, exits and returns are as complicated as principals allow.. Buyers are willing to pay a premium for a business they cannot build. Executives and Boards identify, cultivate and develop a company's culture. Being vigilant as to the culture and its impact outperforms. Financial engineering and product architecture are great tools for contributions and distributions relative mission alignment performance. "Cannot do good business with bad people." Dwight Schar Ask yourself: What do I need to know that I do not already know? What you do not know may be a blind spot that someone will drive a truck through at the time where you are weakest.

Our VC funds focus on companies suitable (and looking) for a trade-sale type of exit. To date we had 15 positive exits, returned fund 1. by >2x (10+ companies still left in portfolio) and fund 2. has returned in five years allmost 25% of capital. For smaller, not so liquid markets, a trade-sale exit is the most common type of positive exit.

EVER Wondered WHY most startups like zomato, paytm, Instacart, uipath etc FALL massively after listing/ IPO ?? It's because they get listed at SKY HIGH valuation to give maximum returns to their Investors - Grand EXIT. But, retail investors have learnt from the past and will be cautious for all future startups IPO. This is BAD for the startup ecosystem & VC's should suggest startups to list at fair valuation so that retail investors can also get some returns after listing.

If a startup is valued too high initially and at scale stage, be wary it would tank at the exit valuation because it had Saturated the lure of it

I will try to navigate the tricky return calculation with simple math: Let's assume that I manage a VC fund of $100m. My management fee would be 2% per year for 10 years. So effectively, I have $80m to invest. Half of that is going to go to zero even if I am a top quartile portfolio manager. My investable amount comes down to $40m. If my LPs would've invested their $100m in public markets, they would've generated roughly $500m in 10 years without paying a management fee. So I have to replicate that at the very least, but with $40m which results in a 12.5x multiple. Historically, VC funds have achieved that kind of success but it is incredibly difficult to screen for start-ups with potential to grow beyond 12.5x in 10 years.

Most commonly, VC's use MOIC method for individual portfolio startups and IRR for overall fund return. For Example - (1) Accel got 25-30 X cumulative return on its total investment of about $60-80 million over the years equal to $1.5-2 billion. (2) At Coinbase's price at the end of its first day of trading of $328, Initialize Capital got a return of 2,200X+ on its invested capital. Overall, Initialized turned $1.3 million in invested capital into a stake valued at $680 million. Whereas most early stage good VC's gave an adjusted return of 25-30% on their fund.

MOIC especially matters for newer funds, where investors are not as confident in the fund. After the fund has been around for a while, they will start to trust the IRR numbers more.

VC's should NEVER force startups to grow artificially to give them quick EXITS. VC raise money from their LP's who are Sovereign funds, HNIs, Endowments, Trusts etc. and they have a fiduciary duty to return money to them with good returns. Hence, founder's need to have good CLARITY about exit strategies for VC which includes - - how much company can grow in next 3-5 years - financial projections - target market and customer persona - preferred exit options like IPO, acquisition etc It helps to keep right expectations between both parties from Day 0.

It is good to have common understanding of the exit goal. Working towards ”good” exit takes years - it is continious process to position your company in the eyes of potential buyer.

As someone who has sold his own company as a founder and also worked on the buying side, I would recommend securing an experienced advisor. A successful exit involves managing many technical details, but it's equally important to acknowledge and navigate the emotions involved. Remember, you'll often continue working with the acquiring company, so it's crucial that this arrangement is both motivating and well-structured.

Get an experienced M&A advisor and have someone with M&A experience in the board to guide the process. There are many ways to increase value in exit, that first timer entrepreneurs are not aware of.

Appoint someone (with M&A) experience to evaluate and lead the potential discussion. Badly managed exit discussions & process can kill the company if the team gets distracted.

How you come in often determines how you get out. What I mean by that is understand clearly in your investment documents if there are rights of first refusal (ROFRs) or other co-sale agreements that will effectively bar or mitigate your freedom to sell when you want. Founders and other investors won't want investors cycling on and off their cap table without their approval, so most term sheets come with some form of approval requirements, ROFR, or co-sale agreement that if not negotiated up front, will determine if and when you can exit the company. If these aren't ironed out on the front end, then you're along for the ride for the duration of the company regardless of choice. Preserve your optionality to sell in a secondary transaction.