I never understood how venture investments worked even though I studied economic science. Let‘s say WeWork for example. If they got 17 billion as an investment and are now bankrupt. Are the owners still rich or broke and blacklisted for future investments idk

Question

I never understood how venture investments worked even though I studied economic science. Let‘s say WeWork for example. If they got 17 billion as an investment and are now bankrupt. Are the owners still rich or broke and blacklisted for future investments idk

In: 755

Answer 1

The business model of VC is basically 3 steps:

1. Convert money into “value” of the company, at a ratio greater than 1:1
2. Let the “value” grow.
3. Covert “value” of the company back to money, at a ratio not much lower than 1:1

What we call a “entrepreneur” is the person that can accomplish step 1 with a ratio much greater than 1:1, and can amplify it further at step 2.

To your question, it depends on who you call the “owner” of the company. The actual operator of the company simply loses his/her job. All the investors of the company lose all his/her investment. But neither of them would necessarily go bankrupt, as long as they still have money elsewhere.

WeWork failed between step 2 and 3. They didn’t sell when the valuation is highest. Remember “value” is a highly abstract concept, so abstract that the time period of step 2 the company can go worthless overnight. And that’s exactly what happened to WeWork.