Countdown to exit: impact of a fund's vintage on fundraising

May 2024

As a seasoned start-up mentor, I’ve helped 100+ founders raise money, from advising on pitch decks, to narrowing down the list of VCs to target based on their funds’ thesis to setting expectations about how long fundraising takes and what it may entail. But I had no idea how venture funds worked! (Thank you to the Venture Partners Fund Fellowship and the VC Lab Venture Institute for teaching me about this!)

TL;DR

If a typical venture fund has a 10 year-lifecycle in which to make investments and profits, with:

The first 5 years are spent on investing in start-ups;
Profits are realized when a start-up successfully exits;
It takes about 2-3 years for a company to execute an exit plan (between board approvals, legal documents, and negotiations); then,

Depending on the fund you get investment from, you may only have 2 to 3 years before the start-up needs to exit. Here’s why that is.

Goals of a Fund: Profits Before Close

Funds provide high-net-worth individuals (and other organizations) with an asset class to diversify investments, expecting a 2.5x+ return on investment; in return, fund managers charge management and fees on profits (also called carried interest), typically as at 2 and 20 fee breakdown structure.

Each firm sets out to have multiple funds.
Each fund has an amount it’s investing in (called the fund size, say $10M), a time horizon (typically 10 years), and its vintage year (or the year the fund started investing).
Within the 10-year horizon:
- - Within the first 5 years of the fund, $10M is first spent on equity in start-ups meeting the fund’s thesis
  - Profits from start-up exits are returned to the investors.

Funds see profits, also called realized gains, when a start-up has an exit. Typically, this is via an IPO, an M&A, or a stock sale on the secondary market, the most common being M&A.

Chirag Modi created the above image to illustrate a start-up’s journey in a fund.
Remember: this must happen before a fund’s lifecycle ends!

As an aside, a fund could extend its lifecycle if there is such a provision in the legal agreement with its investors and if certain conditions are met. But you don’t want to go into a fundraise depending on this!

How a Fund’s Lifecycle Impacts Your Company

Suppose a typical venture fund has a 10-year lifecycle to make investments and profits. The first 5 years are spent investing in start-ups, and about 2-3 years for a portfolio company to execute an exit plan.

If you become a portfolio company in year 4 or 5 of a fund, you only have 2 to 3 years before the start-up needs to exit!

Depending on your industry and longevity, the pressure to exit within an even shorter timeline may be even greater!

The closer the fund is to the end of its investment period, the more picky it tends to get. At this point, the fund managers have seen over 3000 pitch decks! They also may have portfolio companies that would be your close competitors. It’s harder to stand out.

How to Find out Where a Fund is in Its Lifecycle

You’re already researching the VC firm to see if your product/service aligns with its thesis. Check to see if there’s information about their funds and when they launched.

Approach 1: Lookup using Crunchbase

For example, Crunchbase shows us that a16z announced Fund II last month (in April).

Approach 2: Research Using Combination of VC Website and Press Releases

If Crunchbase does not have that information readily available, see if there’s a way to collate when they made which investments in each portfolio company.

Check if the fund's website has a tab to view its portfolio companies. The website may have more information about when the fund invested in each company or more about the company itself.
If that’s not the case, check the start-up’s website or news to see when that investment was made. That announcement may include fund details.

Approach 3: Ask

You’re also already evaluating the fund. To help you further see if they’re a fit, ask:

where they are in the fund’s lifecycle,
what the exit timeline looks like,
and if there are any metrics you should target to better prepare for an exit.

Is the timeline and the metrics in line with your expectations?

Bonus

In discussions of this blog post on LinkedIn, the community points out that:

Now you know the bigger picture around why a fund is interested in investing in your startup and its goals! [Amanda Eakin]
This also makes you more investable! [Gavin Leonard]
Or -- you may decide to bootstrap instead of taking VC funds. [Thomas Hulsmans]

Dony Zaidi summarized it best: "Land a VC investor? The clock is ticking..."

Your exit countdown starts as soon as you’ve closed your first investor!

Your clock to an exit starts as soon as you’ve closed your first investor! It’s a “when” – not an “if”!
What strategy will work best for you and your business?

Good luck!