So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.
Is any business a ponzi scheme?
P.S Saying that, there is research that buying at IPO is rarely a good idea: https://www.youtube.com/watch?v=2a7qhIpxv60
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.
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
The analogy you are stating doesn't sound right.
If the early stage investors' criteria were based on startups' revenue forecasts, then yes, the metaphor would apply.
However, that's not the case. They pour the money expecting for more money to be poured in later, by others. Granted, I'm oversimplifying here, but the simple existence of such criterium is "symptomatic".
investors.gov defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money."
A few thoughts here:
- the money is actually invested.
- the founders are the ones that decide how to use the money, not the investors. (And generally no one suggests that founders as a group are complicit in a Ponzi scheme.)
- the next investment round is not required -- some companies get to profitability or have a good exit without further funding.
- the next investment round is far from guaranteed. Most stats I've seen suggest that ~30% of seed stage companies raise a Series A. So if it's a Ponzi scheme, then it's a poorly executed one ;)
- the outcomes generated by founders who get VC funding are high impact. See: https://twitter.com/emollick/status/1546109494228402176 (quote: This paper argues that 20% of the largest three hundred US public firms & 75% of the largest VC-backed ones “would not have existed or achieved their current scale without an active VC industry.")
- the next stage investor is generally unaffiliated with the earlier investor AND evaluates a company on its merits. I.e. if our seed company can't get to a stage where they can convince at least one Series A investor to invest -- and as mentioned above, many cannot -- then it goes out of business and we lose our investment. And fwiw, if the later stage fund does a poor job picking companies, it will itself go out of business.
- 99% of the time, our investors are not paid back when another investor invests, they are paid when a company exits. That means either the public market or an individual company thought the startup was a good enough business to invest their money into.
- returns are not promised to our investors -- if anything, it's well known that VC is especially risky and that most VC funds don't have good returns.
> So much value is absorbed in the VC pipe than by the time a company IPOs the chance of retail investors seeing returns is minimal to none.
My understanding is that this is largely regulation related. Companies used to go public much earlier, but because there's an increasingly high burden and cost to being public, lots of companies choose to wait for as long as possible. And there is now enough funding out there that companies are able to stay private for a long time.
Sure the core technology, right now, might be "obvious", but a company is so much more than the tech. Without a story, marketing and sales, the company is nothing!
The founders might be bringing connection, validation of the product, LOIs, etc. All of which are much, much* more difficult than the tech.
*usually.
Jokes aside, oftentimes, the most disruptive technologies are not actually technologically difficult. If we take a look at the early days of mega corps today, most of them found an edge in an emergent market with off-the-shelf tech stacks.