What will the investor do if the money he invested in the startup is gone?
It’s OK. As long as the founders did everything they possibly could to make it work. Everything.
There are two types of losses for VCs and professional investors: losses than fit into your “expected loss rate” … and unexpected, and often, abnormally high losses. The first is OK. The second can be Game Over.
Statistically, every early-stage investor is going to see some % of her investment fail, and a large other % not really make much money. As a true angel, your effective failure rate could be as high as 90%. As long as there is one Uber in there — you’re doing fine 🙂 By contrast, late stage investors can’t really afford too much large losses at all. Because the upside is also more bounded.
But net net in all this … investors know what they are doing. They know the risks they are taking.
When investors get hurt hard is when something isn’t supposed to lose money … loses a lot of money. E.g., I write a $500k first into a start-up. Then I put another $2m in. Then $10m in a third round. Then another $20m in the Series C. Now we’re up to $32.5m. In, say, a $250m fund — that’s a lot. Just losing the first $500k? Not a big deal in a $250m fund. It’s OK. Losing $32.5m now though — that’s a Career Ending Move.