WeWork; Jackal Pan/Getty images; Samantha Lee/Business Insider
- WeWork's failed IPO isn't going to change the way venture capital funds behave, according to Erik Gordon, a professor at the University of Michigan's Ross School of Business. That's because no matter how dramatically WeWork's valuation falls, VCs will continue chasing the next big thing.
- Gordon said that investors in venture capital are judged based on backing companies that strike it big, while other types of funds are judged based on the returns they bring in for investors.
- He advises investors to remember that distinction, and said they shouldn't rush to get into high-profile IPOs right after they make their public debuts.
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After its botched IPO and the replacement of CEO Adam Neumann, WeWork might look like an era-defining failure, but it might not change the way the venture capital world works.
That's the view of Erik Gordon, a professor at the University of Michigan's Ross School of Business whose areas of expertise include venture capital, private equity, and corporate governance. He's advised numerous companies and is also the faculty managing director of the school's Wolverine Venture Fund.
Venture capital funds are mainly judged based on the big bets they get right, Gordon said. That makes them very different from hedge funds and other types of investment funds that are judged primarily based on the returns they deliver for shareholders.
"VCs are not chastised for failures. They're chastised for missing out on the next Google," Gordon told Business Insider in an exclusive interview. "There's a lot of pressure to say 'this could be the big hit in my portfolio.'"
Since failure is so common in the VC world anyway, he added, there is an enormous amount of pressure on those funds to bet on companies that have the kind of potential WeWork appeared to have. That's one reason the flexible-office-space company's biggest backer might open its wallet for WeWork yet again.
After watching WeWork's valuation plunge from as high as $47 billion to $10 billion or less, it's possible that venture capital firms will briefly shy away from some of the risky-looking startups, Gordon said. But the lure of backing a giant winner is going to be too strong for permanent change to set in.
"When a company is able to convince the VC world that it's the next hot one that you must be in to look like a real VC, we'll see the same thing over again. Because VCs can't resist," he said.
But he adds that investors don't have behave that way - and if their goal is building wealth and not getting in on a hot investment, they really shouldn't.
"The risk in the first week of trading is going to be gigantic, and are you going to get rewarded?" he asked. "You don't have to jump into a company on the first day or two that it's public."
Even if they don't get in on the ground floor of the next Beyond Meat, Gordon said, a focus on the longer term is safer and will help investors succeed.
"If you think it's a really good company, you think it's going to turn into a big investment, a good investment like Apple, Amazon, you don't have to be in it the first day," he said.