As a counterpoint, the two companies most commonly criticized for having a shoddy business model; Groupon and Zynga, both managed to go public before their valuation imploded. The IPO process did very little to burst their hype bubble.
I suspect a problem with late stage investing is that some of it is marketing for the investment funds. You make a late stage investment in Uber at $40+ billion valuation so that you can tell people you invested in Uber. People who aren't paying much attention assume you are very savy, making a 10-100x return, when you may only be making 1-2x at best.
People assume institutional investors are "smart" so they won't fall for things like this. In some ways they are smart because they tend to be systematic (less emotional than individuals), but in other ways they follow the herd. They need to be involved in whatever is hot.
I find it hard to believe that any late stage investor doesn't realize the difference between net and gross for marketplaces.
Obviously startup founders talk about gross because it's the bigger figure, but even early stage investors ask what cut the marketplace is going to take.
I'm not really sure who the article is aimed at, I would have though that most non-VC late stage rounds are done by the like of investment banks or private equity firms who have a reasonable idea of what they're doing.
Hmmm. A lot of late stage stuff is being done by sophisticated investors, but ones who are sophisticated about other asset classes. Very often large public equity investors are lining up at the pre ipo round thinking they can get some alpha. Think names you associate with mutual funds and retirement accounts.
The other ill matched category that is getting a lot of exposure at these rounds is the private wealth groups of large ibanks. They get an allocation in the pre ipo round and farm it out to private wealth clients, because 1. PWM clients are all accredited investors so they can do it as a reg D exemption, and 2. The PWM clients feel special and like they are getting insider access from their PWM. I'm not super clear on why the companies take the PWM money, although I suspect that in fact it is a shrewd form of pre-marketing the IPO by getting private wealth clients to go bragging to their friends about the hot pre ipo deal so the friends want to buy it when it goes out.
Even private equity firms who would seem well matched to the size and structure of deal, often IMO come with mismatched expectations. The PE guys love complicated terms, dividends, fees, promotes, and all manner of East Coast legal wrangling which is often quite out of place in a relatively "clean" West Coast tech deal.
> most non-VC late stage rounds are done by the like of investment banks or private equity firms who have a reasonable idea of what they're doing.
They know exactly what they're doing, but their customers don't necessarily. Investment Banks are more than happy to buy and flip overvalued assets to suckers provided they don't have to hold on to them for too long (c.f. 2007.)
