Introduction:
We entrepreneurs are deeply dedicated and commit ourselves to our startups, most of the time pushing back thoughts about failure. However, we need to be realistic: some ventures, despite the best of our efforts, don’t work. As we grapple through this possibility of a fall in our brainchild, we tend to assume that the same would fall with them the investors who believed in our vision.
All investors, especially venture capitalists, take considered risks in funding a startup-in addition to committing their capital, they also dedicate time and knowhow. In India, there are over 5,500 startups, who are backed by venture capital. Failure among startups does not only bitterly disappoint the entrepreneur, but investors incur losses as well-many of whom: financial as well as strategic.
A venture failure is heavy not only for the entrepreneur but also to investors and people working for the business. The following article will pick apart post-startup failure analysis from the viewpoint of venture capitalists.
Venture capitalist:
VCs, taking prudent risks, place stakes in emerging potential companies like yours. They spend a lot of time and money on a business analysis. A start-up’s failure reflects poorly on them as well. Then what happens to bankruptcy or failure of such a VC-funded company?
With this in mind, venture capitalists have to make decisions based on so many varied issues that may surround the fact that one of their startups has failed. This could include monetary considerations, contractual obligations, strategy, and much more.
Failure Analysis:
Venture capitalists want to take back every penny of value possible from the investments they make. Normally, it’s already a full “post-mortem” analysis to find out why the failure happened in the first place. Finding out why a startup failed is to teach valuable lessons to venture capitalists on how to make better investment choices in the future. VCs use or transfer what they have learned from bad investments to an improved investment thesis and portfolio strategy. The best returns are always gotten for the investors as there is a continuous need for venture capitalists to be learning and changing by improving the way they invest.
Liquidation:
Liquidation is one of the significant ways through which loss is recovered by venture capitalists. This is the selling of startup assets: anything ranging from intellectual properties to physical inventory for some percentage of the investment. However, liquidation recovery depends on several factors such as type, liabilities present, and market conditions.
Selling the Company:
In other situations, VCs may also consider selling the startup when it is almost about to shut down. This process usually includes finding possible buyers interested in buying the technology of the startup, its customers and employees, or even the entire brand. Selling the failed startup as a whole can sometimes be difficult compared to liquidation but can give venture capitalists a partial chance of recovering their money back.
Debt and Equity:
Another strategy that VCs use when a startup fails is that of negotiating debt restructuring or equity conversions from other creditors and stakeholders. VCs can lighten some of the weight of a bad investment by turning outstanding debt into equity stakes or renegotiating payment terms. This, however, makes negotiations complex because creditors and other stakeholders have competing interests that have to be balanced.
Beyond having to deal with the fallout from a failed investment, however, VCs also have a higher fiduciary obligation to their LPs, the investors who commit capital to their funds. This means there’s a requirement to be transparent about the performance of portfolio companies-those companies in which they invested-much like any failures or setbacks they experienced on their journey.
Not all VCs are heartless, though. Besides funding the start up using venture capital, they assist in aiding the founders of the start-up and its employees during the transition process. For example, they may offer guidance and mentorship to the founders so as to enable them figure out their next course of action or assist employees to make a way to other jobs by contacting people in their network.
Conclusion:
It is easier to close your business if you had a robust operating agreement. This can be achieved by inculcating all the necessary information such as who makes what kind of decisions, at which stage venture capital funds a startup, how assets are shared, and the priority order for creditors.
As an entrepreneur, one should learn to accept the concept of starting with keeping the end in mind. However, it might be the negative thing to think about when you are starting a business but you should be prepared for the possibility of failing to survive in the long term.