| The basic aim of investing in a startup is to make big money by investing in the big companies of tomorrow and have equity against your investment. That long wait and the risk you took will be worthwhile if a successful exit happens and you have made capital gain on your investment. You sell your equity to the next buyer and earn on the basis of the valuation of the startup.
Let me explain with an example. Suppose you had invested INR 10 lacs in a startup whose valuation was INR 1 Cr at that time. So you hold 10% equity currently. After 1.5 years the startup's valuation becomes INR 10 Cr so your investment value also becomes 10 times that is
INR 1 Cr. At this time the startup raises another round of INR 3 Cr from another VC or investor. At this point you can either take an exit or stay in the company. If you choose the former and decide to exit, you sell your equity of 10% back and take 1 Cr as your return on investment. If you choose the latter and stay in the company, you can exit in the upcoming rounds at higher valuation.
Various Scenarios of Exit Opportunities
1. Acquisition by a larger company One option is for the startup to sell to a larger company. This can provide you with a good return on your investment. Generally, the larger company may buy the startup in order to acquire its technology or other assets.
2. Bought out by a later investor When a startup raises another round the new investor buys the equity from the existing investors.
3. Soft landing with a competitor If a startup is unable to find a buyer but is still operational, it may be able to find a “soft landing” with a competitor. In this scenario, the competitor will buy the assets of the startup and integrate them into its own business. This can be beneficial for both parties involved, as the competitor will gain access to new technology or products and the startup will be able to continue operating without having to shut down completely.
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