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The term sheet will also dictate the percentage of ownership the VC firm, or firms, will take, “plus a whole bunch of legal stuff,” says Peterson.
Entrepreneurs should understand that every VC firm invests with an exit in mind.
“Nobody gets a big payday unless the company is sold or goes public. That’s how venture firms return the money to their investors,” says Stone. “We’re not investing so you can have a lifestyle company and work four hours a day. It is completely the antitheses of that. We are investing so you will work your butt off and make us money and at the same time, you make money. It is capitalism at its best.”
Most venture funds have 10-year lifecycles. Hence, the VC firm won’t want to invest in your company for any longer than six to eight years, depending on where the venture fund is in its lifecycle. Some VC firms don’t want to invest for any longer than three to five years. However, early-stage VC firms like Epic typically model their investments for longer periods than later stage VC firms do.
The industry your company is in may determine the amount of return the VC firm expects to get by investing in you. For example, Stone says Epic Ventures models its investments as 10x, meaning if Epic puts $1 million in your hot technology company, the firm will expect to get $10 million out.
“Now whether that is a sale or an IPO, quite frankly, we don’t care, as long as it is 10 times,” he says.