Sova VC
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Sova VC

Liquidity gaps are causing founders to walk away from their startups too soon. Here’s how we can solve this

Here’s a question to think about: how many startups fell short of their potential, and how many founders walked away, because a liquidity gap forced them into a premature sale or exit?

There’s no shortage of stories to tell about the successful companies, but what about the ones that might have been? The ones whose founders decided they could no longer bear the startup grind or simply lacked the motivation and financial incentives as the company scaled?

In the past, the path to maturity in most high growth tech startups led to one of two outcomes: either an IPO or the founder(s) exited the company. But with changing dynamics in the venture capital market this path has lengthened which has created a fresh set of scaling challenges.

Today, the timeframe for founders at a company at series A or B stage could potentially last up to ten years as they grow the business and continually raise its valuation. Yet founders are so laser focused on building products, and on the company’s survival, that they lose sight of the bigger picture — not just for their company but for themselves.

At certain points, life will tap them on the shoulder: the time may be right for them to pay down a portion of the mortgage on their homes, to invest in their children’s education, or simply to reward themselves for the years of effort to date.

Their ability to act on these triggers will depend on their personal financial situation. Founders often don’t receive bonuses and, more often than not, receive salaries below the market rate, at least during the early years. So there can be situations where they have worked for several years without investing in any personal assets. It’s easy to understand the frustration many founders feel as they build a company.

There comes a moment when founders need to be compensated. But if their wealth is tied up in the company, the thought of staying much longer to realise some of that value can lead them to the exit door.

If they feel they have no options to obtain partial liquidity, they may be more inclined to exit early rather than building something meaningful, impactful and of significant magnitude in terms of scale. Most founders hate fundraising. So, when they receive what appears to be an attractive offer to sell the company, they may be tempted to seize the opportunity.

Another cohort of shareholders looking for liquidity options are early-stage investors who no longer have the capacity or strength to invest in follow-on tickets. Almost every growth-stage company has such investors and as their ability to fund growth is exhausted, founders need to find new capital to achieve scale and realise their ambitions. These early investors are often looking for ways to exit and can be replaced with more institutional investors, with deeper pockets, and often more supportive capital, which can also contribute to bridge round financing.

This is the challenge that the Sova VC Liquidity Fund, backed by anchor partner Luna Wealth, was created to address. Our $50 million fund is aimed at providing new liquidity options for early-stage shareholders and investors in high growth technology companies.

We will typically invest between $1.5 million and $9.5 million to acquire equity in growth stage companies where early shareholders — whether that is founders, CEOs, managers, employees, or angel investors or shareholders — want to obtain partial or full pre-exit liquidity.

Liquidity funding is a flexible way of allowing shareholders to realise early returns in between regular fundraising rounds. This allows them to exit partially or fully and provide returns to their own investors. What’s more, it simplifies the investor structure within the company.

I believe the role of venture capital should be to help nurture new, significant, sustainable, independent companies — not just food for corporates to stay relevant by acquisitions. As I see it, when founders walk away too soon, it’s the worst outcome for the community — and for society. It deprives us of potentially game-changing startups.

We look forward to supporting founders, early investors and shareholders with liquidity solutions through the Sova VC Liquidity Fund.

This is a particularly important milestone for us at Sova VC as this fund complements our offer and consolidates our path to build a platform of services.

If you are interested, get in touch for a conversation!

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Sova VC is an international investor, backing ambitious and disruptive technology companies. Its initial fund targets early-stage companies, focusing on B2B/B2B2C marketplaces and software platforms. Its Liquidity Fund provides flexible solutions to the direct secondary market.

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Alexei Tuknov

Alexei Tuknov

Partner @Sova VC with over 10 years’ experience as a VC investor, completed more than 60 international deals & passionate about helping growth-stage companies.

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