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It seems that some startup unicorns lose value as soon as they go public (e.g. Uber).

Would that mainly be because its shareholders (early VC) eventually want to pull out. And that would be the most convenient, or even only possible way, to get their cash out of the investment?

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Why do some startup unicorns lose value as soon as they go public?

Well, some companies lose value soon after they go public because the mass of investors value them less than did the investment bank (in consultation with other investors) which set the value of the shares.

Investment unicorns were name so because they have a high capital value (over $1Bn) and "the statistical rarity of such successful ventures".

Would that be, mainly because it's shareholders (early VC) eventually want to pull out.

"Eventually" and "as soon as" are contradictions in terms.

And that would be the most convenient, or even only possible way to get your cash out of the investment?

Kinda.

https://www.forbes.com/sites/alejandrocremades/2018/08/02/how-venture-capital-works/#561916631b14

VCs make money on management fees and on carried interest. Management fees are generally a percentage of the amount of capital that they have under management. Management fees for the VC are typically around 2%.

The other side of making money is the carried interest. To understand this concept, carried interest is basically a percentage of the profits. This is normally anywhere between 20% and 25%. It is normally in the largest range if the VC is a top tier firm such as Accel, Sequoia, or Kleiner Perkins.

In order to cash out and receive the carried interest, the VC needs to have the portfolio of each one of the funds making an exit, which means that the company is acquired or will through an IPO where investors are able to sell their position.

Normally exits take between five to seven years if the company has not run out of money or the founders have run out of energy. Typically VCs want to sell their position within eight to 10 years, especially if they are early stage investors.

Start-ups are a very risky type of asset class and nine out of 10 will end up failing. For that reason, VCs will go for those companies with the potential of giving them a 10x type of return so that it can help them with the losses of other companies inside their portfolios. If you are not able to project these kinds of returns, a VC might not be the route to follow for financing.

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  • ""Eventually" and "as soon as" are contradictions in terms." I thought so too, at first, but on re-reading, I think "eventually" refers to the VC-type investors, who "eventually" (i.e. after the 5-7 years from your quote) want to get their money back and do so through an IPO. The "as soon as" refers to the immediate fall after the IPO if the price was set too high (and, possibly, was riding on a wave of hype and irrationality that surrounds some IPOs). – TripeHound Jan 13 at 8:43
  • @TripeHound it's possible. I don't like assuming, though; better for OP to clarify. – RonJohn Jan 13 at 8:46
  • If I were a pedant, I'd point out that you've more-or-less assumed they are contradictory :-)... although I also agree clarity from the OP would help. – TripeHound Jan 13 at 8:49
  • @TripeHound I don't like assuming your interpretation... :P – RonJohn Jan 13 at 8:55
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One aspect of going public is that a public company has to publish a lot more information on their situation than they do as a private company. The bulk of this effect happens before going public and can already make a big impact whether the company will go public at all. For example, in the WeWork disaster is partially accounted to dubious practices that came up while preparing for the IPO

Once the company is public, it has to publish on its financial situation on a regular basis and in relatively great detail. These information is now basically accessible to anyone interested as compared to the situation before where it was only available to a very small group of interested venture capitalists.

Startup unicorns are generally a bit of a hype business. Especially concerning the high profile unicorns, I often have trouble seeing where all this value is coming from. Many of them have a simple business model and were first in a land grab (e.g. AirBnB, uber). This can change as fast as the initial grow. A vivid example of this is studi VZ (German social network) that disappeared almost withing weeks. Combine this situation with the fact that a lot of highly valued startups are not making any profit (uber, WeWork) and it is easy to see that a hype will have a hard time to continue once the financial details are public.

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