The Venture Capital Fund Lifecycle
Venture capital funds don’t last forever. They tend to run on a predictable, ten-year cycle. To give you a better idea of your interactions with VCs, look at their activities paired with yours over the lifetime of the fund.
Investors spend the first year raising a fund from high-net-worth individuals (accredited investors), corporations, and institutional investors like pension funds. You aren’t involved at this point. If it’s a new firm and/or a new fund, you may not even know that the VC exists yet.
VCs spend the next few years finding companies to add to their portfolio (called sourcing deals). During this period, you’ll get introduced to a VC through a mutual contact, or you’ll submit your pitch deck to the VC through the VC’s website.
After the company is given investment and becomes part of the portfolio, the VC proceeds to manage the company. Generally, VCs do this by joining the board.
VCs are very helpful to entrepreneurs throughout the investment relationship. They tend to act as the voice of experience in the relationship because they’ve been through company building many times. During this time, you’ll be working hard to develop new products, increase revenue, and basically do what you do best — run your company.
As the fund nears the end of its lifespan, the VCs work to liquidate the companies through mergers and acquisitions. If the company does very well, it may go public and become a company traded on the open stock market. If the company isn’t doing well, it can be shut down and its assets sold separately.
It’s the VCs job to sell your company to a buyer. It’s your job to let him. This is how you cash out and take home the spoils of your hard labor.
As all the companies in the portfolio are sold, the money is returned to the original investors (limited partners) who entrusted their cash to the VC, and the VC fund closes. At this point, you’re free to do whatever you want. Your formal relationship with the VC is over, and you can start a new company, get a 9-5 job in a corporation, or retire.