3 ms·

If early capital thought they would get better risk adjusted returns holding on to companies, they wouldn't exit. When considering a trade, you have to ask you

If early capital thought they would get better risk adjusted returns holding on to companies, they wouldn't exit. When considering a trade, you have to ask yourself "what do I know about the future prospects of this asset that the other party doesn't?" For IPOs you can see how stacked this transaction is against the public.

SilverBirch 4y ago
I don't think this is right. The reason VCs exit is simple, they're VCs. They exist to invest in start ups. Their job is to invest in high growth, high risk start ups, and the risk premium reflects that, they're a certain type of asset class. That's why people give them money. People don't give money to VCs to buy Walmart stock. If a VC thinks it can get a better risk adjusted return investing in Walmart then they're not a VC. Why would a limited partner want the VC parking their cash in an established business? They already have allocated their capital amongst different investments including VCs to get the mix of investments they want. So the right thing to do is as the company matures and risk drops, they exit their investment. If the company still offers good risk free returns, well then the LPs can buy the stock, or their hedge fund investments will buy the stock. But the fundamental issue is if VCs stay in companies beyond a reasonable point then they're not doing their job.
- kareemsabri 4y ago
  I think it's more that they have a time expectation of about 10 years to give the money back to LPs with any profits and share results of the fund.
- sooheon 4y ago
  All good points. Those are justifications for VC's existence as a financial instrument. But that's orthogonal to whether retail should buy into IPOs. Elsewhere in this thread there's discussion of VC concern regarding downstream investment/valuations, reluctance to have down rounds, etc. Clearly VCs can and will delay rounds unless they can earn a premium. It's self evident that this extends to IPOs, the last "downstream investor". Due to self selection, these IPOs will be biased toward times when the VCs judge that hype/expectations are high enough to unload at a premium. Part of their job is ensuring such conditions exist at exit, via marketing, etc. Apparently the evidence bears this out -- the first two years after IPO, companies tend to underperform after adjusting for equity risk factors: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733

SilverBirch 4y ago

I don't think this is right. The reason VCs exit is simple, they're VCs. They exist to invest in start ups. Their job is to invest in high growth, high risk start ups, and the risk premium reflects that, they're a certain type of asset class. That's why people give them money. People don't give money to VCs to buy Walmart stock. If a VC thinks it can get a better risk adjusted return investing in Walmart then they're not a VC. Why would a limited partner want the VC parking their cash in an established business? They already have allocated their capital amongst different investments including VCs to get the mix of investments they want. So the right thing to do is as the company matures and risk drops, they exit their investment. If the company still offers good risk free returns, well then the LPs can buy the stock, or their hedge fund investments will buy the stock. But the fundamental issue is if VCs stay in companies beyond a reasonable point then they're not doing their job.

kareemsabri 4y ago
I think it's more that they have a time expectation of about 10 years to give the money back to LPs with any profits and share results of the fund.
sooheon 4y ago
All good points. Those are justifications for VC's existence as a financial instrument. But that's orthogonal to whether retail should buy into IPOs. Elsewhere in this thread there's discussion of VC concern regarding downstream investment/valuations, reluctance to have down rounds, etc. Clearly VCs can and will delay rounds unless they can earn a premium. It's self evident that this extends to IPOs, the last "downstream investor". Due to self selection, these IPOs will be biased toward times when the VCs judge that hype/expectations are high enough to unload at a premium. Part of their job is ensuring such conditions exist at exit, via marketing, etc. Apparently the evidence bears this out -- the first two years after IPO, companies tend to underperform after adjusting for equity risk factors: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2929733