ELI5- When a company IPOs, isn’t it at the point that VCs have already extracted all the value, and they’re cashing out? Do they have to hold?
In: 0
A startup is a company that, in a short time, goes from being worth about nothing to either being worth nothing at all (in most cases) or being worth quite something.
VCs specialize in investing in such companies, because although the risk of losing your investment is quite high, the reward if it does not pays for it.
Once the company is worth quite something, the growth to being worth even more is much more probable, but the factor by which the company grows will never be that high.
So for a VC willing to risk losing the money completely, it is better to pull out the money and invest it in more companies being worth about nothing.
The key concept here is _opportunity cost_. The opportunity cost of doing a thing is the potential reward from doing _something else_ that one misses by doing this thing.
Latest Answers