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Know Who Will Own Your Company When You Pursue Venture Capital

  • Harvard Business School professor looks at different approaches taken by venture capitalists depending on whether they’re a tighter-knit group or more dissociated
  • Close groups of investors are more likely to pursue an acquisition, while dissociated groups are more likely to pursue an IPO
  • Understanding the benefits and risks of each approach

Summary by Dirk Langeveld

Knowing how a venture capitalist firm will approach your startup is an important consideration when pursuing funding, according to a recent analysis by Harvard Business School professor Rory McDonald.

McDonald looked at the outcomes of more than 42,000 new ventures in his research. He advises that entrepreneurs know more about a VC firm’s structure and likely actions instead of simply jumping at an available funding opportunity.

McDonald’s findings included:

  • VCs who work with the same group of partners are more likely to pursue a quicker exit from a company, often by seeking an acquisition by a larger business
  • This type of group could provide a stronger path to success due via pooled resources and industry connections, but could minimize founders’ role in the business
  • A more dissociated group of VCs has a greater likelihood of pursuing an exit through an initial public offering, which leaves founders with more control but entails more risk along the way
  • Sixteen percent of the ventures analyzed by McDonald ended in an acquisition while just 2.9 percent ended in an IPO

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