Investors make money if they sell their stock (or other instruments) for more than the purchase price. Without and IPO or M&A, how would this happen?
I included directly because sometimes the investment doesn't go well itself but results in a subsequent investment (e.g., the same founders or other employees start another company or the VC makes a connection that leads to a Whatsapp situation).
Sometimes companies will be pushed into deals that don't really make a profit but at least get the VCs a longer ride. Years ago I was at a startup that had taken $7M but never got to real revenues; the VCs instigated a sale of the company to a very large, already public company that essentially returned the $7M to them. Today we'd have probably called that an aqui-hire since the buyer took only the engineering team and laid off the rest. But the VC got their cash to invest again and perhaps more importantly the partner on our board got his time back to invest elsewhere.
Another startup I was at only took angel money, about $2M, but literally never took in a penny, and we simply shut the company down--I had to get rid of the office furniture--although the two main investors sold the intellectual property to another startup for stock.
But short of an IPO or big money acquisition, I don't see how a VC makes money directly.
Investors also make money from dividends. They are the traditional way an owner of a privately held company would see a return on their investment. A VC may not want to hold shares in a mature, dividend paying company because they don't fit the VC's investment profile, but an IPO is in theory not the only possible exit. The VC could sell its shares to a non-VC private equity firm, for instance. Or a sufficiently successful company could buy back its stock that is held by the VC. In practice I am not sure how often this happens - it definitely doesn't seem common.
In some cases, a subsequent investment round will buy out the VCs (and/or founders) by buying some or all of their stock.
A few typical situations where this could happen: 1) a particularly interested investor (often a company in a similar space) is willing to pay a premium on the price they'd get elsewhere to align strategically or make sure a supplier or partner stays in business. 2) The VCs sell the stock to later-stage VCs or private equity. This can happen if the needs of the company/founders and VCs don't align. For instance the early VCs want to get out because they prefer to invest in quick hits and don't want to keep their attention on the company for the long-term, so they sell the stock to someone that's willing to take years (and the resultant risk) for a pay out. 3) The founders or the company itself buys out the VCs. Typically this would happen for situations where there's a different vision for the company, for instance the founders want to turn it into a lifestyle business, or a case like #2 where the VCs are losing patience. If the company buys the shares, it has them to distributed to new employees or to limit the number of outstanding shares and therefore increase the price per share.
VC's get paid through management fees. They get paid regardless of outcome, but their careers last longer if they are successful.
