3 Reasons Why Growth Equity Funds Should Provide Liquidity

700 648 David DeWolf

In “Why the Rise of Growth Equity Is Good for Business,” I outline two reasons why Growth Equity funds are on the rise. The first is that the rise in bootstrapped businesses is creating demand for post-VC funding. I discussed the reasons why an entrepreneur would want to take on capital here.

The second reason is for entrepreneurs to seek liquidity. Unfortunately, too many growth equity funds still shy away from providing it. Here are three reasons they shouldn’t shy away.

Liquidity allows the entrepreneur to focus on the business.

The life of the entrepreneur is stressful. Only 1 in 10 new ventures last past the first year and the odds only get worse from there.

When you’re navigating troubled waters, don’t you want the captain of the ship to have undivided focus? A little bit of liquidity can go a long way towards providing it. Taking some chips off the table so that the entrepreneur can pay off his mortgage or fund the kids’ college educations can provide just enough financial freedom to allow the entrepreneur to shed a little stress and refocus on the business.

Liquidity encourages the entrepreneur to make the right bets.

When everything you’ve worked for is riding on every decision you make, it’s easy to become risk-averse. The last thing you want is your entrepreneur hedging bets. Providing a little bit of financial cushion allows the entrepreneur to focus on growing the business as opposed to protecting his net worth.

Liquidity allows the entrepreneur to taste success.

The entrepreneurial road can get tiring and a little bit of liquidity can be just what’s needed to refresh the engines. By helping the entrepreneur realize a small reward for their efforts, the investor can help recharge their engines. Due to their typical vision and optimism, oftentimes it’s not even the entrepreneur who needs refreshing, but rather the spouse who’s put up with the entrepreneurial lifestyle and requires a tangible reward to recommit themselves to supporting the entrepreneurial efforts.

In most cases, there’s no need for the entrepreneur to have a disproportionate windfall. A reasonable amount of liquidity can help the entrepreneur go from living paycheck to paycheck to having a little margin in their lives. This can be healthy for both the business and the entrepreneur.