An entrepreneur asks: What happens to all the portfolio companies when a VC has to close shop?
Short answer: nothing happens. Companies are independent of their shareholders.
Long answer: this situation isn’t likely to happen for one simple reason. VC firms manage closed-end funds, which can have a tenure of anywhere from seven to 12 years (including fund extensions). Longer time horizons are more common than short ones. If you’re an entrepreneur accepting a fund’s money today, it is far more likely that your company will close shop before the VC does.
Of course, VC firms do go out of business too. Let’s take a hypothetical example:
- VC firm ABC Ventures raises its first fund, which has a life of seven years.
- ABC then invests in a few companies over a period of two-three years.
- For whatever reason, ABC does not raise any more funds after its first fund.
- At the end of seven years, ABC is required to liquidate its fund and return proceeds to investors in its fund who are known as Limited Partners or LPs.
- Ideally, ABC would have exited all of its investments before the end of seven years.
- If ABC still has shares in portfolio companies that it has not exited, then ABC will seek to convert these shares into cash by finding a buyer for them. LPs have invested cash in the fund and expect to receive cash when the fund is liquidated.
- ABC may technically have the right to pass on shares in its portfolio companies to its LPs, but this happens very rarely.
- Portfolio companies continue to live on, just with a different shareholder at the table.