January 26, 2022

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Realized Investment in VCs Meaning and Key Explanations

Realized Investment in VCs Meaning and Key Explanations
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Realized Investment arises when a venture capital firm has exited from a private equity company it invested in. As you may have already read from my previous articles on VCs, the main goal of their funding is to exit the startup after some years. It is from such exit venture capitalists earn their rewards.

Definition of Realized Investment

Realized investment of a VC is the part of its private equity fund that has been exited or the company has shut down. It is also called permitted investment and refers all fundings to a startup that a venture capitalist has realized income, gains, or losses.

Key Explanations of Realized Investment

It is part of the private equity fund. Yes, the fund is made up of realized and unrealized investments. This fund is a pool of resources committed by the limited partners of a VC firm. When a VC exits a private equity company, it is said that the investment has been realized.

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There are primarily two ways VCs exit from startups. Through an initial public offering (IPO) and merger or acquisition deals. A third way they exit is through capital reconstruction. But this method isn’t common. More so, a fourth method is when the company shuts down. Here, the VC may only recover a part or all invested capital.

For IPO, the VC sells its investments to investors who are interested in owning shares of the startup. This can be done through a recognized stock exchange market or over-the-counter market (OTC). OTC is mostly used by small businesses who want to trade their shares.

Merger or acquisition are two words that have different meanings. But are used together in the finance world. A merger means that two companies are combined to become one company. Just like the marriage of a man and a woman. And it is said that the two shall become one flesh. The acquisition is the outright purchase of a company by another entity.

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When a VC realizes an investment, it either earns gains or incurred losses. If it sells its shares in a stock exchange market, the intention will be to sell it above the cost of the investment in the private equity company. So that it can earn capital gains. However, if market forces push the price of the shares below the cost, then it incurs capital losses.

Conclusion

Realized investment of a private equity fund only occurs when the VC firm exits the startup or when the company shuts down. Exit is usually through an IPO, merger, or acquisition, and through capital reconstruction. In all, the goal is to earn capital gains from such exit and maximum limited partners’ wealth.

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