Startups · Entrepreneurship

Does raising funding from VCs limit your exit?

Ryan Braffman Writer

September 20th, 2016

Since VC firms are going after the 10x returns in order to comply with their investment thesis and keep their LPs happy I wonder if that philosophy also impacts the exit opportunities of the entrepreneurs that accept financing from VCs.

Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

September 20th, 2016

It most assuredly does.   VCs want to pay off their LPs within a fixed number of years that their fund lasts, and they want a high ROI.   Founders might well be happy with more modest profits and a lifestyle business.  But that won't meet VC needs.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

September 20th, 2016

VCs are generally happy if there is an exit. A lot depends on the relationship that you have with the firm and the terms of the original financing. I have seen VC firms buy out the founders rather than let them sell out to a 3rd party "too cheap" but its rare. in some cases the entrepreneurs can sit out and let the VC bring in new management  to continue to grow the firm.

Peter Baltaxe Consultant, product leader, serial entrepreneur

September 20th, 2016

In many VC investment deals there will be a clause or clauses that give them some approval right over the liquidity event of the company.  There may be a minimum size for a liquidity event stated.  They want the ability to block a sale that might be great for the founders but bad for the investors, e.g. the "acquihire."   Even if this is the best outcome for the company, having the right to block such a deal gives them some negotiating leverage to get the best return for themselves (and their LPs) that they can get out of the transaction. 

Michael Barnathan Adaptable, efficient, and motivated

September 20th, 2016

Investors normally demand a right of refusal on potential exits for this reason. So although the entrepreneur typically feels they have a duty to generate a return for the investor anyway, the investor has the power to veto such deals. Of course, the founders still have to be incentivized enough to continue working, and a blocked exit is one of those things that might destroy that incentive. Investors (good ones, anyway) will probably prefer to talk founders back in rather than using the nuclear option.