Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 2 down vote favorite
2

This might be a really dumb question but I've heard of a few cases where VC's have purchased into a business and it made me wonder. Facebook's purchase of Instagram recently made me think to ask on here.

If a VC were to buy into your business or you went to a VC for funding, who would get the money? I originally thought that it would get invested in the business, but what if a VC were to knock on your door asking to buy in, would you pocket some of the cash in return for selling shares in your company?

share|improve this question

2 Answers

up vote 6 down vote accepted

Venture Capitalists invest in the business -- the money typically goes to the business for use in running the business. Sometimes (but VERY rarely), the company distributes some of that cash out to its shareholders.

When a company is bought out, like Instagram was, then the people who used to own the target company typically either get cash or stock of the acquiring company. That's why VCs invest in companies.

share|improve this answer
up vote 0 down vote

The VC puts the money into the business, by buying shares, as that makes the business more valuable. This is why they talk about pre-money valuations.

If they gave the money to the founders, they'd probably be distracted and not work as hard, so the investment would tend to fail. By putting the money into the business, the founders would tend to work even harder, to materialise their new found paper wealth.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.