Dec 12, 2012 VC
Part 4 (Final) A Vc Firm Makes Money Accel And Facebook Case

In the last post, I promised that I was going to explain the four exiting events:

- IPO

Initial public offering (IPO) is the act of issuing a company’s shares to the public. There are other names for this such as public offering, flotation or publicly traded company.

When a company lists its shares on a public exchange, the money paid by investors for the newly-issued shares goes to the company.

This is the best way a venture capitalist can exit his investment in a startup.

Read more about IPO here.

- Acquired / Merger

Mergers and acquisitions can be abbreviated to “M&A”. Mergers mean that two or more companies are joining to become one entity. Acquisitions (takeover or buyout) mean that a company is “buying” another company. This is the second way a venture capitalist can exit his investment.

Big companies acquire a lot of startups to expand its own set of products, to buy talents, users and technology.

Read more about M&A here.

- Bankruptcy

Bankruptcy is a declaration that a company or a person cannot pay its debts. Simply saying, a company is bankrupt when it is “out of business”.

This is definitely a situation that every venture capitalist wants to avoid.

Read more about bankruptcy here.

- Staying private

A company that does not release shares into a stock market or it is not acquired is a privately-held company. Most of the small and medium size companies are privately-held companies. Usually, they don’t have a lot of shareholders. A startup usually starts as a private company and in the long term becomes a public company.

Sometimes, the shareholders of a startup may decide that the best way to keep a profitable business is to remain private. Depending on the type of technology or market, investors do not want to attract the attention of competitors or other companies in its market. A private company does not have to release quarterly earnings to the public.

Now, let’s see what the exits for Accel’s investments are.

1 – Yahoo! Microsoft etc… buy Facebook for XXXXX money

Read the news about Facebook rejecting acquisition offers here.

This is our second type of exiting that Facebook and Accel could decide to go for. However, it is not the reality because Facebook didn’t sell itself yet. This is not an ideal situation because it is not very easy for any company to buy Facebook in the price range of 5 or 15 billion in this economic crisis. However, we could list some potential buyers given their amount of cash in hand: Microsoft, Google, etc.

2 – Facebook goes IPO

As you know, this is the best way to reward a VC’s investment. The VC buys the shares cheaply in the beginning of the startup life and sells it high after the IPO. Imagine that Facebook would get a market value of $ 15 billion, Accel and all other investors stated on my previous post would literally get those amounts of money. In case of Accel, they would get almost 130 times of their investment.

3 – Facebook stays private

Most of the VCs would avoid staying private. When a company is private, the shareholders cannot sell their shares easily to other investors. Moreover, the price given is not as high as a VC could expect in his shares. In case of Facebook where they have a lot of shareholders, almost nobody would want to have the company private. Instead, they want to do an IPO and cash in their stocks.

4 – Facebook goes bankrupt

This would happen if the company makes a major mistake or loses market shares or runs out of money and investors. In this worst case scenario, all investors, founders and employees lose money. In this case, the investors can “liquidate” the company which means they want to sell everything the company has, like a garage sale, and all the money they get is redistributed among all the investors. In this case, VCs have some special clauses in their shares that give them preference to receive this pool of money.

Wow! That’s a lot of posts about this.

The next series of posts I will talk more about valuation (I’m not a valuation freak yet), some common questions about VC, news, etc!

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