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
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Investments are buying a slice of the company. So when investors gave wework 17 billion dollars , they were given equity , or negotiable stocks in the business. When bankruptcy happens , the business is sold off to pay off as much of the debts it can. The value of assets gets divided among all the people it owes , in around the order of government taxes , wages and so on. People who had loaned money to the business (bondholders) are next , and finally the investors (shareholders)
Investments can be like buying a lottery ticket , with a very very low chance of big payoff, say $17 billion payoff. You get rich if your ticket wins. More often your ticket wont win , and you wont get anything. In the worse case, the business itself does not do well and so many people bought tickets and the payoff is so small such that you loose money.
Most of the responses here don’t directly address the question.
Generally speaking, the owners (shareholders) of a private VC-backed company like WeWork that goes bankrupt do not make any money from that company. There are three exceptions:
1. The operators of the company (as opposed to the investors) obviously earn cash compensation in addition to equity. At mature companies, this cash amount can be large (high six figures, maybe even low seven figures annually), and once earned, is usually untouchable in a bankruptcy except in cases of fraud.
2. A shareholder might have already sold some of his shares to an outside investor in what’s called a secondary transaction. Founders and early investors often do this as part of late-stage and pre-IPO rounds. Of course, now that new investor is the one losing money after the company goes under.
3. Sometimes during bankruptcy there are assets that can be sold off, with the proceeds going toward paying back debt holders, then equity holders (another term for shareholders), in a specific order of preference. Asset liquidation usually doesn’t amount to much but if you’re high up the preference stack and get lucky with the liquidation, you might get your money back and little bit on top.
All that said, most investors making VC investments have a diversified portfolio, so even in a worst case scenario they themselves are not broke after a bankruptcy. And they’re certainly not blacklisted from future investments, legally speaking, unless they committed fraud. But make enough really bad bets and you may very well end up broke (if you’re an individual) or unable to raise your next fund (if you’re an institution).
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.
AFAIK many VCs rely on investing in many private companies where they know most, statistically speaking, will fail, but one investment can earn them so much it’ll cover the losses of every other one. Entrepreneurship is massive risk for massive reward, and the people investing in it know the outcome of most startups. We work lasted longer than the others, so it’s actually not that bad.
Investors don’t usually invest their entire life savings into a company. When people say “they lost everything” they generally mean they just lost what was invested, not literally everything they had before that.
What some people here forget: the companies are re-valued with each funding round. So e.g. at some point, someone offers 1bn for 10% -> the whole company is then valued at 10bn, although 90% of the shares were bought at a significantly lower prices. So the top valuations are to some extent theoretical numbers and shareholders have massive book gains, but they are not realized before they sell the shares. When valuation crashes, especially early investors who bought their shares cheap don’t loose too much actual money which they spend on the shares, but rather loose a lot of their theoretical gains
The answer depends on when the venture fund invested – seed, A, B, C, IPO, etc. and the fund size / strategy.
Early investors likely did not lose money since at the time of investment WeWork was worth less than today. Especially if they exited their positions along the hype phase, or prior to / shortly after IPO.
The later investors probably lost money since they couldn’t sell their position (too many red flags) and WeWork’s IPO wasn’t exactly hot.
However this does not mean a VC fund is now “broke”. Most VCs have multiple funds and each fund places multiple bets on different companies. It is likely that WeWork may have dragged down the performance of a single fund, but if other exits pan out the end result may still be ok. Kinda like how people bet on multiple horses in a horse race.
As for the prior “owner” / CEO, Adam Neumann, Marc Andreessen just invested $350M into his new idea named Flow. In this instance, is the owner still rich? Yep. Blacklisted? Not from Andreessen but Masayoshi / SoftBank probably won’t be sending Neumann holiday cards anytime soon much less another check for investment. In Theranos / Holmes case, the answer is “no” on all accounts.
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