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Chapter 9. Choosing the Wrong People > Did the Venture Firms Make Money from th...

Did the Venture Firms Make Money from the Bubble?

The investment banks pocketed large fees for taking public Internet companies. This is in the public record. But it's very hard to determine how well or how badly venture firms and angels did. Certainly there were some big winners, but there were also losers. Comprehensive data does not exist to tell us the full story. Neither venture firms nor angels are required to make public their finances.

Some early investors sold out before an IPO, for this can be done with the permission of other investors. These were not sales to the public, but to other individuals or institutions who were acceptable buyers to the other early investors in a company. Unfortunately, the only way to know about this is by looking into a company's records. Some other investors got out at the IPO, and this can be determined from the IPO documents. Other early investors had to hold their shares for a period after the IPO by agreement with the underwriter—a so-called lockup—but sold as soon as they were free to do so. If they were insiders—that is, executives or directors of the firm—the sale would be public record; if they were not insiders, it would not be. A venture firm might have distributed shares to its investors, and they could have sold without record after the IPO (sometimes they were included in a lockup; sometimes not). So it is remarkably difficult to tell if insiders and venture firm investors got out before the collapse of the market. On balance, it appears that venture firms made money over the period of the bubble and its bursting—but this is not certain, and studies are underway which may answer the question.


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