Innovative Ways VCs Seek Liquidity Amid Scarce Startup Exits

VCs are getting creative to find liquidity as startup exits have been rare. Secondary sales and continuation funds are becoming more popular, and some investors are trying to add a "portfolio sale clause" to funding round documents. This clause allows VCs to sell shares in a company without giving other investors the right to block it or sell their own shares at the same time. While this clause is still rare, it could become more common as VCs engage in more secondary sales. Some lawyers warn that allowing one investor to include the clause could open a Pandora's box, making it easier for other investors to request the same. Overall, VCs are looking for more flexibility to liquidate stakes as the trend of buying and selling stakes on the secondary market becomes more popular.

Key Takeaways

• Venture capital (VC) investors are getting creative to generate returns as startup exits have been limited.
• VCs consider secondary sales, continuation funds, and revisions to funding round documents for flexibility.
• A new clause, the "portfolio sale clause," allows VCs to sell shares in a company without other investors' right to block or sell simultaneously.
• The portfolio sale clause has been increasingly used by older funds with fewer exits looking for liquidity to wind up or sell assets.
• While the portfolio sale clause is still not widespread, its use could become more common in secondary sales and continuation funds.

Analysis

The decline in startup exits has led to venture capitalists (VCs) exploring creative methods for liquidity, such as secondary sales, continuation funds, and the "portfolio sale clause." This clause allows VCs to sell shares without other investors' approval, increasing flexibility in liquidating stakes. Although currently rare, its use by older funds seeking liquidity may popularize it. Consequences may include increased secondary market activity, potential disagreements among investors, and a shift in power dynamics. Over time, this trend could lead to more diverse exit strategies and impact the regulatory landscape of VC investments.

Did You Know?

Secondary sales: These are transactions in which existing shareholders sell their shares in a privately held company to other investors. Secondary sales have become more popular in recent years as startup exits have become less frequent. VCs are increasingly using secondary sales to generate returns for their investors.

Continuation funds: These are funds created specifically to buy the stakes of existing investors in privately held companies. Continuation funds allow VCs to hold onto their investments for longer periods while still providing liquidity for their investors. These funds are becoming more common as VCs look for ways to generate returns in a challenging exit environment.

Portfolio sale clause: This is a clause being added to some funding round documents that allows VCs to sell their shares in a privately held company without giving other investors the right to block the sale or sell their own shares at the same time. While this clause is still not widespread, it could become more common as VCs engage in more secondary sales and continuation funds. Some lawyers warn that allowing one investor to include the clause could open a Pandora's box, making it easier for other investors to request the same.