The transaction here is between risk takers (venture capitalists and investment banks) and risk pricers (people who buy stock). Nobody is getting "ripped off" as long as everyone is following the rules set down by the SEC.
Investors put money at risk. You know that because you've been here on HN a couple of years and no doubt read the <foo> is shutting down. stories. For each of those there is usually one or more investors who have put in thousands if not millions of dollars who get anywhere from $0 to some fraction of their investment back. Sometimes, their investment 'bet' pays off and they get back multiple times their investment. The trick is you blend all of those $0 and multi-X returns and you get their "effective" return.
"Joe Public" and by that I assume you mean an unsophisticated retail investor (they aren't investing anyone's money but their own). Can achieve a similar result by buying "shares" in a fund managed by a banker. When folks ask me where I would put some extra savings I tell them I've been very pleased with the Vanguard funds. You make more than then .8% return that a Bank savings account pays, and your risk is relatively moderate (but if it is not zero like it is with the savings account). But this unsophisticated person should never be investing in an IPO stock.
The professional managers who invest in an IPO stock may have hundreds of millions of dollars under management. They spread some of those over a number of IPOs as a way to provide 'long kicks' (which is that the stock is held for a long time and the success provides a large return many years later). Clearly they aren't putting their kids college fund in there. And most of the other dollars in their fund are on much 'safer' sorts of things, like Coca Cola or Alcoa.
So this is the 'cycle of life' for many new tech companies, and if these investors in Twitter do well their Venture Funds will have a reasonable rate of return, and more rich people will give them some of their 'excess' funds to invest in other tech companies, and you and I can go get some of that by pitching them a great team and a great idea.
So for the 11 times smart people came to them and they gave them millions and got nothing back, this 12th time they got a lot back. Nobody gets hurt as long as the people who don't know what they are doing stay out of the game. That didn't happen in the late 90's lets hope it doesn't happen again.