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?
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.