Liquidity events can be viewed as the “end game” for venture investors, giving them the opportunity to convert their illiquid stake in a startup into liquid assets.
In 2014, Facebook acquired the messaging app company WhatsApp for $21.8 billion. One big winner of this acquisition was venture investor Sequoia Capital, which turned its $60M stake in WhatsApp into $3B—a solid 50x return.
Five years later, ride-hailing pioneer Uber went public at a $75.5B valuation. VC firms First Round Capital and Lowercase Capital—both of whom had invested in Uber nine years earlier during its seed round at a $4M valuation— saw spectacular returns. First Round Capital had its $510K stake become $2.5B, while Lowercase Capital saw its $300K stake turn to $1.1B.
WhatsApp’s acquisition and Uber’s IPO are both examples of massively successful exits for venture investors, founders, and employees of the company (assuming those employees had equity). Such exits also have another, more technical term—liquidity events. In this article, we’ll dive into liquidity event details, including the types of liquidity events and what both investors and founders should understand about them.
Venture capital investments are illiquid assets, meaning they cannot easily be converted into cash. A liquidity event is the “end game” of a venture capital investment—the point where the investors see their investments converted into liquid assets, hopefully for much more than what they put in.
These liquid assets are not necessarily cash—they can be in the form of publicly traded shares as well. For instance, the WhatsApp acquisition was done primarily through Facebook stock.
Liquidity events come in three primary forms:
Considering most VC funds have a 10-year lifespan with the initial investment period being 3-5 years, it’s safe to say that most venture investors generally expect a liquidity event to occur between 5 to 10 years. According to Statista, in the United States, the median time taken between the initial VC investment into a startup and it going public is 5.7 years. In 2020 (the most recent data available), it was 5.3 years.
Of course, there will be substantial variation depending on the startup, its industry, exit type, and prevailing market conditions. For instance, Pitchbook notes that the most common startup liquidity event—acquisitions—is now happening at earlier stages. In 2021, most acquisitions have come directly after a seed or Series A round. Meanwhile, the data shows most startups do not go public until after their Series C.
Although startup liquidity events are a primary motivation of many venture investors, investors should be aware that:
General partners (GPs) and limited partners (LPs) alike can only realize profits after liquidity events. The GPs can earn carried interest from them, and they’re the source of all distributions to LPs. But liquidity events are not “one size fit all”—nor is the path toward achieving them necessarily so straightforward.