Venture Capital – Representation of Investors

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Legal support for investors in struggling investments

There seemed to be no limits. The booming tech industry created a gold rush atmosphere among both startups and investors. The motto was that the fastest would win. Thus, private investors, institutional investors, or private equity firms were all the more willing to invest large sums in startups and their business ideas, without knowing whether the business model would ultimately be successful. Disillusionment has since set in, and many of the once-promising companies are now struggling with significant economic problems, facing bankruptcy, or have disappeared from the market.

At the end of the boom, a lot of investors’ money was burned, and the high risks of venture capital became apparent. However, investors’ money does not necessarily have to be lost. There are various ways to minimize financial losses or save the investments, according to the law firm MTR Legal Rechtsanwälte, which has been advising in capital market law for many years and possesses extensive expertise in the field of venture capital and private equity.

Many of these booms were made possible by venture capital in the first place. With venture capital, investors specifically look for young companies that are not publicly traded, have potential for success, but need financing to fully unleash their growth potential and economic power. Some internet giants have come into existence solely through venture capital. The advantage for investors in such emerging startups is that they can acquire shares at a low cost.

Venture Capital Must Bring High Returns Quickly

However, investors in venture capital are not looking for long-term, continuous growth of the business. On the contrary: the invested venture capital must quickly yield returns. Annual returns of 20 percent are often calculated. However, this can only be achieved if the company’s revenue explodes, allowing the companies to reach a billion-dollar valuation as quickly as possible and be sold with a high profit margin. The aim is for profits to be realized quickly; continuous corporate development is not the goal of the venture capitalists. Venture capital funds are also typically set up with relatively short durations of between ten and twelve years.

The fact that venture capital is aimed at rapid growth of companies also makes it very risky. It requires visionary abilities to predict how a startup will develop and whether its business model will prevail. Therefore, it must always be expected that some companies will not manage to hold their ground in the market. However, by the time it becomes clear whether the company will succeed or not, a lot of money has already been pumped into the company by investors.

Investing in the Potential of a Company

Risk capital providers primarily invest in the potential that young technology companies offer. This can work and has often worked. However, it can also backfire because the potential of the business idea may be overestimated. Yet, investors accept this risk. The principle is: “First come, first served.” This means that investments are consciously made in business models that have yet to demonstrate their actual value. Once the investment decision is made, there is no hesitation or wavering. Then, substantial capital is pumped into the company to drive up its value and also to oust potential competitors early. The hope is that the invested money will yield a disproportionately high return in a short time.

However, if this hope is disappointed, the money is quickly burned. The high company valuations then become unsustainable, and the value of the shares plummets drastically.

Negative Development in Many Startups

This development is currently being observed in a number of startups that were celebrated a few years ago and are now facing significant difficulties. It becomes particularly problematic for founders when they have assured investors—as is common—that they will get their money back in the event of a sale of the company, even though the value of the company has since fallen below the capital raised.

Just in 2021, the situation for many startups was much more favorable, and capital providers invested generously in the companies. In addition, the prolonged low-interest-rate policy made money cheaply available on the market, thus more and more money providers appeared. With the high financial injections, however, the number of competitors also increased, who had to share the same cake. This led to no one being fully satisfied and for some, only crumbs were left. The result was that the high flights of the companies turned into nosedives.

The Market Leaves Many Losers Behind

Moreover, the conditions have changed significantly. Due to the interest rate turnaround, especially investors who had taken out large loans to invest in startups are now in trouble. Instead of reaping high returns, they now have to serve high interest rates.

Currently, the previously booming tech market has left many losers behind. This affects both the founders and the private investors and institutional investors.

Extensive Experience in Capital Market Law

The law firm MTR Legal Rechtsanwälte has been advising its national and international clients in capital market law for many years. Due to their long-standing experience, they are competent contacts for private and institutional investors as well as for private equity companies that have invested venture capital and lost money. MTR Legal supports investors in minimizing financial losses and shows options for restructuring or exit strategies.

If it becomes apparent that the business idea will not be successful and will not yield high returns, it is essential to consider suitable exit strategies in time to minimize the impending financial losses. MTR Legal presents appropriate measures and supports investors in timely selling their shares. Furthermore, it can be examined whether the investment can still be saved through various measures. If this is the case, MTR Legal advises on planning and implementing suitable restructuring measures.

Consistent Representation of the Interests of Private and Institutional Investors

If a restructuring is no longer possible and bankruptcy proceedings have been initiated over the company, MTR Legal Rechtsanwälte represents the interests of private and institutional investors in the insolvency proceedings from the legally secure registration of claims to negotiations with the insolvency administrator or creditors’ committees.

In insolvency proceedings, investors must regularly expect significant financial losses, as it is not expected that there will be sufficient bankruptcy assets to fully satisfy the claims of all creditors. However, it can also be examined whether investors have arisen claims for damages. Claims may have arisen, for example, against managing directors and other company managers if they have violated their duties. Claims may also have arisen from purchase or participation contracts.

MTR Legal Rechtsanwälte is highly experienced in capital market law and well acquainted with the risks of venture capital and private equity. Our lawyers consistently represent the interests of investors.


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