Like other VC funds, we have specialized in financing and developing young, promising companies in particularly early stages. In these early stages, most companies are not yet profitable and need external capital to develop. Start-ups raise money from business angels, VC funds and other investors.
Since start-ups in these early stages of development do not generate any dividends for the investor, our business model is to greatly increase the value of a portfolio company, which is in the interests of both the start-up and the investor. Capital, know-how and investor networks help start-ups to achieve this goal. With the available funds, a company can compensate its losses and at the same time invest in activities such as research, development, prototyping, validation and more. The company can thus grow and develop much faster than it would without external capital. It makes sense for entrepreneurs to sell or dilute their own shares if this can be more than offset by capital, help, etc., and the value of the company increases accordingly. All parties benefit, which would not have been possible otherwise.
If the start-up develops strongly and its value increases significantly, in many cases external interested parties will approach the company in order to acquire it. These are often already existing partners or customers who expect strategic added value from an acquisition. Because start-ups have a special technology or ingenious business model, for example, buyers will pay a good price for a company even if its profits are only small or non-existent. For the investors, this is the point at which they will consider an exit.
An exit means that the investors and often also the founders sell their company shares, for example in the form of a trade sale, if the company has a high valuation, and hopefully generate a significant profit. With the sale, they leave the company as partners. This is where the term exit originates from. For us it is clear from the outset that our investment equates to a temporary partnership. We make this transparent at all times. An exit can affect a company in such a way that it is sold in its entirety and all previous shareholders are “paid out”. The term exit can also refer to a situation where only one of many shareholders sells their shares and withdraws as an investor. If shares are sold by one investor to another, this is a so-called secondary.
Similar to the life cycles of a fund, there are three phases in the cooperation between a fund and a start-up. In the acquisition phase, an investment is examined, negotiated and implemented. By far the longest is the holding or development phase, where funds and investment companies work together to generate value and make the company successful. This is where founders and investors create what is subsequently sold in a successful exit.
Once the buyer and seller agree on all the technicalities, formal cooperation between the company and the fund ends. In most cases, however, the founders carry on in the company as managing directors or in other senior roles. They often stay invested in the company to continue to create an entrepreneurial incentive.