Venture capitalist Sequoia Capital India & SEA, now known as Peak XV Partners in India, has recently made a complete exit from Go Fashion. They have achieved a remarkable 20x return on their initial investment in Indian rupees, along with an impressive 48% internal rate of return for the company.
Isn’t it a perfect formula for investment? Invest at the early stage, guide the company to success, and then exit with their profits – The typical VC Culture. While this marks Sequoia’s first Indian exit, they have made 363 exits worldwide, including notable companies like Apple and Zoom.
The current practices of VCs when it comes to exits and founder departures raise questions about whether they genuinely invest their funds in startups or simply capitalize on the knowledge and expertise of early-stage founders. It seems they prioritize increasing startup valuations and maximizing their own profits, without focusing enough on actual value creation, innovation, and long-term growth.
Let’s delve into some examples that shed light on the VC culture:
Let’s begin with the story of Housing.com. Despite facing various challenges, it serves as a prime example of how founders can fall into the “funding trap,” diluting a significant portion of their equity while VCs take control of the company’s operations. Eventually, the startup achieves unicorn status, but a substantial amount of money is spent on marketing and advertising, rather than genuine value creation. Interestingly, it’s common for investors to choose investments not based on great ideas but rather on potential exit routes and profitable returns.
Next in line is the IPO phase, where VCs strategically exit through Offer for Sale (OFS), as we have witnessed with companies like Zomato, PayTM, and Nykaa. Pre-IPO investors often multiply their investments two or threefold, successfully capitalizing on the IPO opportunity.
The ultimate goal is to list the company, and when the IPO finally arrives, it becomes evident that the majority of exits have occurred through OFS.
In some cases, the VC firm may even acquire the startup entirely. Examples like Housing.com and Ashneer Grover’s BharatPe demonstrate how founders are steered toward the exit route, but it doesn’t always guarantee positive outcomes for both the company and its founder. Similar situations have occurred with renowned figures such as Jack Dorsey of Twitter, Steve Jobs, and Andrew Mason of Groupon.
Also Read: All about ONDC: What is ONDC? How Will It Benefit MSME?
There is a prevailing myth that VCs take on significant risks when investing in startups
While it’s true they assume risks, their exposure is comparatively limited. Even if a startup fails, the VC firm remains financially secure. Why is that? VCs charge an annual fee on committed capital, typically around 2% over the fund’s lifespan (often 10 years), in addition to a percentage of profits at exit, particularly during IPOs or acquisitions.
Thus, even if a VC firm raises a $1 billion fund and charges a 2% fee, they secure a fixed stream of income, such as $20 million per year, covering their expenses and compensation. VC firms frequently raise new funds every 3 to 4 years, accumulating substantial capital. Regardless of the investment performance, they enjoy significant financial gains. In contrast, entrepreneurs lack this safety net. Furthermore, any issues within the company or disgruntled shareholders tend to blame the founder, rather than holding the VC or investors accountable. For instance, who was held responsible for the decline in PayTM shares? Vijay Sharma, with only an 8% stake, or Ant Group, holding approximately 25% ownership of PayTM?
From an outsider’s perspective, it may appear promising when a VC invests in a company and transforms it into a unicorn. However, founders often find themselves not receiving the recognition and rewards they deserve. VCs and VC Culture can sometimes be more of a burden than a blessing, sometimes acting as gaslighters
Perhaps that’s why many founders choose to exit from their own founding company on their own terms, like the Bansals from Flipkart or Jerry Yang from Yahoo.
