Ever wonder when a company raises $100M, how does venture capitalists get their money back, even when the company keeps on raising money in further rounds, and the worst part the company is infact losing millions of dollars every month! Here will talk exactly how the investor get his millions back, so read along.
1.Investment in a form of a loan followed by equity:
First of all, all deals are different, they all have their own clause as every investor wants his money back and not just principal by 5x as the risk he took. So, investment as a form of loan is pretty common, where investor invests money as a form of loan at a particular rate of interests that need to be paid back by certain time period and after he gets his money back, he attains a small portion of equity .So, all of it sounds vague, lets talk in some figures
A investor invests in company X about $500,000 at 13% rate of interests for 36 months, so after 3 years he gets around $600,000 that’s about 120% of what he invested and on top of that once 3 years are over, he attains 5% equity. Now, for company who is in need of cash, its ideal as they know they would be generating profits 10x of what the loan in 3 years that’s $5Million.
2.Selling their equity:
When an investor invests in a company as a straight equity deal, he is quite certain that the startup could be bought by a giant and in 5-7years down the line he could get 10x of what he invested!
So, if an investor invested say $100K as seed investment for 20% at $500k valuation, and company is bought by a giant at $5m in 5 years, investor straight gets $1M that 10x of what he invested in!
3.Royalty deals followed by equity:
Royalty deals are by far the most interesting as an investor straight a way gets profit margin for every goods sell, and after he gets 3x(but depends what both parties agreed on!), royalty vanishes and investor is given a small portion in equity.
for a company selling say a juice can for 2$, their profit margin is $1, investor invests $100K as loan but gets 25 cents for every can sells. Now, say company sells 50K cans every month, investor gets 25cents*50k=$12.5K, and investor gets 3x money back in just 2 years, and also have 5% equity left!
But, all these are best case scenarios but reality is 95% startups fail every year!
Hope, this would have given you a brief idea regarding investment and would help you to take good decision about your startup!