Well, let’s assume there is a market. It would be for the shares of the company. The issues with venture capital backed companies is that the shares are not concentrated with one owner. After all, that is what venture backed means - founders sell shares to a VC to get capital into the company to grow. The alternative to selling shares would be to re-invest profits or to take debt. Usually neither is available, hence equity is being sold.
In the 90ies and prior, founders would sell a majority of shares to an investor, so that the investor in fact would have control. Yet power has shifted to the entrepreneurs. Today, founding rounds look roughly like this:
Ownership is on the left Axis. At the founding, Founder A and the Founder B jointly own 100%. Founder A owns 60%, founder owns 40%. Enter the seed investors (yellow), the series a investor (green) and the series b investor (orange).
Let’s narrow down the question “why is there no market for failed VC companies” to series a founded startups and beyond.
When would a venture investor sell?
For a VC selling its shares makes sense in a few situations.
One: branding value. Selling to a well-known company can bring status to an investor regardless of the economic benefit and increase status and make it easier to attract capital and entrepreneurs. Note that I do not mean this demeaning at all, it is just the business model of an investor. Warren Buffet does the same thing.
Two: economic value. If the investor believes, the current bid is the highest available during the planned holding period of the shares, than it makes sense to sell.
But what about a market for failed company
The question proposes, that the company is “failed”. Presumably, that means that there is nobody willing to pay a price high enough that would make all the shareholders happy. Venture capital backed companies are designed to be sold within 5-7 years, that is how the VC firms earn money.
Failed means - either there is no additional capital available for growth or nobody wants to buy the majority of the shares. The first option injects more money into the company, the second just buys the shares of the shareholders.
Of course, there is in fact a market for the shares when a VC fund reaches the end of a lifetime. It is in essence a distress position for that fund - shares can be sold back to the founders personally, to the company or to a third party. If the shares have certain rights, such as a drag along, the VC might also force the other shareholders to sell. But, since this is not much fun for any party involved it is not a heavily advertised market. Yet, it does exist.