The venture capitals have perfect visibility to the growth of the startup. There is a total funding and a head count. There are many expenses, that includes equipment, office, marketing, software costs and many others. There is a month over month burn rate and the revenue. The goal of a startup is to show revenue at the right time interval, i.e. the milestone. A lot of business planning taking place to predict the revenue. There is no reason for building a startup if you can’t charge your customers for it. Twitter and Facebook were exceptions because they targeted such a large audience. If you have such a large audience, just by displaying advertising on the page, the company can do fairly well, for a small to midsize startup.

The problem is many startups don’t reach that kind of scale, compared to Facebook and Twitter. However, that’s what all the venture capitalists want. It’s like the mobile craze in early 2000s. All the venture capitalists wanted to invest in mobile, and then iPhone came along. Lots of mobile investment went under. Social media and social networks has that much demand in today’s world. Only a few are realizing now that the power is in the social networks, and also social media tools that can help capitalize on the social networks, make money. If the startups can’t reach their full potential and deliver, the venture capitalists need to get their money back. They start to shop around the startup and find any interested buyers. The under sell is when it’s understood the company hasn’t reached the full potential. In this case, lots of time it’s a stock deal, not cash. The buyer company might be interested in the employees as well. If the company has an upside, usually the venture capitalists will keep it around for themselves, invest heavy, get a payout later.