Structured Exit Investment Funds Offer Venture Capital ROI With Decreased Risk & Improved Liquidity

CONVENTIONAL VENTURE CAPITAL SERVES ONLY 4% OF STARTUPS WELL

Venture Capital was designed 74 years ago to fund innovation; it was not designed to fund privately held companies that are the foundation of economic stability. To date, fewer than 4% of venture-backed equity-funded companies have had successful exits within 8-10 years and more than half of all conventional VC funds are not returning ROI to their investors. The results of conventional venture capital funds should give investors, entrepreneurs, and civic leaders pause: 80% of all venture-funded companies fail within five years, 16% continue to operate, but never return capital to their funds, 3.7% provide a positive exit for founders and investors (CAE 2019 study).

Clearly, with so many venture-funded companies failing and failing to return ROI, it is evident that the conventional venture capital equity funding model that requires an exit (sale or IPO) is rarely suitable for either investors or entrepreneurs. What’s required to improve outcomes for investors as well as entrepreneurs is a fresh and appropriate funding model.

Returning capital to investors more quickly and in a more reliable manner is one substantive improvement a venture capital firm that offers Structured Exits can provide over conventional venture capital funds. Where conventional VCs focus only on unicorns, which by definition are rare, funds offering structured exits offer similar capital returns (the goal of both fund types is generally 3x) to investors without forcing companies to exit or die in the process of trying. As such, these structured exit funds are better equipped to invest in under-represented founders, a sustainability goal for many of today’s investors.

“I don’t think people appreciate the inordinate opportunity that’s out there”

– Carla Harris, Vice Chair Global Wealth Management, Morgan Stanley referring to multicultural & female-led tech startup investment opportunities

STRUCTURED EXIT INVESTMENT MODEL INCREASES STABILITY AND ROI

The Structured Exit investment offers a conventional venture capital investment with reduced risks, shorter time to liquidity, and opens the opportunity to invest in strong, midsized companies that are the foundation of the economy.

Example: A Structured Exit-based Fund invests $5M in a company for 5M shares. The investment agreement specifies a 3X ROI ($15M) if the company buys back those shares within 48 months. If the company takes more than 4 years to buy back the shares, then the company will pay a premium for each share, such that the fund will receive 4X or $20MM.

The Agreement also contains elements that help to ensure the viability of the company. In this example, the fund invests capital in a company that is currently generating $200k in monthly recurring revenue (MRR). The company will use the invested capital to expand sales. The agreement states that in any month in which the company has revenues of $400k or more, the company will use 15% of gross revenues to purchase back the stock at the agreed price until acquired in full.

Each investment is crafted to balance risks and potential rewards. All rights of conventional venture capital investments are maintained, including tax treatments. Additional considerations are crafted into the agreement to provide investors rewards if a profitable exit for the company is achieved within a reasonable period of time following the completion of the structured exit. Benefits of structured exits include substantively reduced risk and time to liquidity, favorable tax treatments, and improved opportunity to obtain returns that are commensurate with the risk of the asset class.

The chart below is an example of what this would look like if the growth of the company is reasonably strong, but does not scale with the classic ‘hockey stick’ curve that conventional VCs look for. In the scenario above, it will take just under seven years for the company to return 4X to the fund.