We've heard the good stories of startup that succeed after receiving funds but what happens if a startup that got funded by a VC but turns out being failure a couple of years later?
Do they get sued or go to jail? Or maybe get chased by a mafia? Does anybody know the consequence? I want to know the consequence before really dealing with VC.
As Jason and others indicated in their answers, it is not illegal for the business to fail and unless there was some kind of fraud involved, you should not be worrying about your investors suing you or any implications of jail time, etc.
For the business itself, there are actually a few possible paths forward and exactly what happens depends on how the business is dissolved and what the creditor situation looks like and what kinds of assets remain in the business. For the sake of discussion here, because there are VC's involved, I'm assuming the business is incorporated and therefore all equity holders (owners) are insulated from the liabilities of the business (see footnote) unless somebody personally signed for something.
For the most part, the VC's, assuming they have controlling interest in the situation will want to do one or some combination of the following things with the business:
The exception to the above and the common cases that come to mind relative to personal signatures might have been involved include:
When VCs invest they are accepting the risk that the startup may fail.
If your startup failed because of normal market circumstances (no illegal activities) and you didn't violate any binding contracts with the VC then you should generally be free from lawsuits or other legal problems.
Disclaimer: The post above is an entrepreneurial tip and should not be considered legal advice. Please consult an attorney for legal advice.
There's all sorts of reasons why you shouldn't worry about this:
A business doesn't just up and fail one day. It usually happens over a protracted period of time, during which time both the entrepreneur and the investors are implementing as many measures they can to ensure the business' survival. Some times,however, the value proposition was not as robust or the busines not as scalable as everyone thought, or market conditions simply such that the business can no longer succeed.
An entrepreneurial undertaking has inherent risk from the start. Venture capital is risk capital. By its very definition, risk implies a significant potential for failure. The entrepreneur doesn't start out with that end in mind (in fact most don't even allow the thought to enter into their mind). The venture capital firm doesn't invest with the thought that they will lose their money, but know that it is a distinct possibility. Some times, stuff just happens! And, at the end of the day, all will,begrudgingly, accept that reality.