Why can't VCs short startups?

Question

Textbook market theory says that the ability to short sell or otherwise bet against a security is essential for appropriately quick downward price adjustments. This mechanism seems to be missing from venture capital, despite the great incentive that the large number of very bad companies creates.One specific example is that many major investors were highly skeptical about Theranos well in advance of the publications that exposed them. Why were they trading in private markets at such a high valuation when those skeptical investors could have been betting against them?

mytailorisrich · Accepted Answer

Shorting requires a liquid market and a way to obtain shares (my understanding is that a common way is to 'borrow' shares from, say, investment funds, and to pay interests on this loan).Pre-IPO startups, like all private companies, are not traded on any markets. They are private companies with shareholders and shares transactions are thus done 'manually' so to speak (you need to go out there and find a buyer, negotiate face to face, then handle the paperwork and payment).

ksec · Answer

That is not a bad idea? As long as VC allows those stocks to be traded via certain private / limited market.Not sure if there are any regulation hurdle though.

elisharobinson · Answer

you can and this is done by betting on the competition, but since theranos was not a publicy traded company you couldnt short it. All though you could short the VC investing in them or could short Bond if they floated the bonds on the bond market.