Personal Bets are famous in the world of VCs but disputed
Venture capitalists often make personal investments in startups, but this can be an ethical minefield.
From this scenario: An investor at a venture capital firm makes a bet on a small but promising startup. Later, the VC firm he works for invests in the same startup, increasing its value tenfold.
Is this fair? Individual investing and the profits it can yield have long fueled debate in Silicon Valley and beyond.
Personal bets are a great method for investors to acquire early access to hot startups, providing their companies with a competitive advantage. Others believe the risk of conflicts of interest is too great, given VCs’ desire to promote firms they already own—possibly at greater values than necessary.
— Bloomberg Technology (@technology) December 8, 2021
What is obvious is that personal investing is commonplace, even among Fortune 500 companies. Peter Thiel, a well-known venture capitalist, has done it, though he refused an interview about it. According to public records and filings collected by Bloomberg, they’re joined by lesser-known investors at large VC firms such as Alphabet Inc.’s GV, BlackRock Inc., and DST Global. Their firms utilised client money to back the same company in at least a dozen situations.
As venture capital reaches new heights in 2021, the topic of whether or not personal investments should be permitted remains as important as ever. The number of angel and seed investment rounds—in which individual investors stake their bets rather than larger corporations—has increased. However, there is no agreement in the industry on how to classify individual VC deals, or whether they should be allowed at all.
According to individuals familiar with the investment, senior executive Marcelo Claure of SoftBank Group Corp., home of the world’s largest technology fund, spent $15 million in NFT company Sorare in early 2021.
SoftBank led a $680 million funding round in September, valuing the French firm at $4.3 billion. Deep Nishar, another SoftBank executive who recently announced his departure, invested in artificial intelligence startup Petuum Inc. in 2016. A year later, Nishar championed SoftBank’s investment in Petuum.
According to a source familiar with the transactions, SoftBank’s compliance team approved both of these investments.
To avoid conflicts of interest, SoftBank has since revised its approach, requiring employees to sell back their stakes at their original price. SoftBank’s representative declined to comment.
Some VC firms accept private investing but require investors to sell their shares to the firm at a loss if the firm eventually invests with client funds. That implies the VC won’t lose money on their investment, but they won’t see any returns beyond the firm’s profits.