What happens after i invest in a Startup — VC for Dummies

Well, after my first write up on the said topic, here i am sharing some more information, bite sized and easy to understand.

My intent is to make this reading light and easy and not daunting for you.

I always wanted to get into VC for a long time, but never found a compilation / collection of information which gives people like me (first timers / dummies) an easy reference to fall back on. So here i am, putting all my learning together to make it easy for us dummies to get into VC.

In my previous write-ups, i covered, the basics of VC, the stages of VC & touched upon how do VC’s make money.

In the US, it only became legal for non-accredited investors to invest in privately-held companies in 2015, so it’s not an asset class that’s widely understood outside of the world of professional venture capitalists and angel investors.

You certainly aren’t alone if right now you’re asking yourself, “What happens now?”…

Portfolio Company Updates

Generally speaking, early stage investors should expect to receive updates on a quarterly basis. A good investment update will include information about the company’s progress, information about industry developments, any business challenges, and ways you (the investor) can help.

Please keep in mind that private company reporting can be irregular. And the responsibility ultimately falls on founders to produce and distribute updates.

Liquidity and Exit Events

Never invest more than you can afford to lose entirely. Once your investment has been closed, you should anticipate holding investments for an average of 5–7+ years before a potential liquidity event.

Liquidation events can come in many forms, but most typically include IPOs, acquisitions, mergers, and/or bankruptcy. In such instances, you might receive common stock, cash, or shares of the new entity, respectively. In the event of a public offering (i.e., IPO) your shares would likely convert into common stock.

Investors should generally be notified by the company directly regarding any liquidity events.

Investments often come with a redemption right, but that’s rarely exercised. If the investor wants their money back because the company is underperforming, the company probably doesn’t have enough cash on hand to do that. If the company has enough cash to pay the investor back, it’s probably doing so well that the investor would rather own the stock.

There are some other kinds of investors with different goals. Strategic investors are paid back in the form of a relationship, or influence, a product or service they can use in their own operations, or securing a long term customer or supply chain link. There are venture debt investors too, so they get paid back in loan payments and often an equity kicker.

The Importance of Diversification

Investing in startups is exciting and has the potential for outsized returns, but it’s not without its risks. It’s commonly accepted that the majority of your returns will be concentrated in just a select few startups, and a liquidation event is not guaranteed. Most companies will likely either fail or fail to provide a meaningful return for their investors. That’s is why a diversified portfolio is so important–it increases the odds of having one of these “winners” in your portfolio.

Businesses need time to become profitable, and it might be a while before even the strongest startup is prepared to go public or secure an acquisition.

A small attempt towards sharing the knowledge of my learnings.

Stay tuned for more small byte sized learning. Will keep adding more.

VC for dummies Chapter 2 here…. which covers some common angel investing terms , difference between VC and Angels.

In the third edition, i talk about the risks associated with VC, requirements to enter into VC, min investments, some questions to seek from founders when you review startups & getting started.

Do give me a clap and share ahead (i love being motivated).