Think about it in this way:
You want to open a wholesale food distribution business for restaurants in a Manhattan
You want to make sure that enough restaurants will buy from you
They want to make sure that enough costumers will buy from them
The customers are going out less because of a downturn in the economy
So you do not open our business because the stock market is down
If early capital thought they would get better risk adjusted returns holding on to companies, they wouldn't exit.
When considering a trade, you have to ask yourself "what do I know about the future prospects of this asset that the other party doesn't?" For IPOs you can see how stacked this transaction is against the public.
I don't think this is right. The reason VCs exit is simple, they're VCs. They exist to invest in start ups. Their job is to invest in high growth, high risk start ups, and the risk premium reflects that, they're a certain type of asset class. That's why people give them money. People don't give money to VCs to buy Walmart stock. If a VC thinks it can get a better risk adjusted return investing in Walmart then they're not a VC. Why would a limited partner want the VC parking their cash in an established business? They already have allocated their capital amongst different investments including VCs to get the mix of investments they want. So the right thing to do is as the company matures and risk drops, they exit their investment. If the company still offers good risk free returns, well then the LPs can buy the stock, or their hedge fund investments will buy the stock. But the fundamental issue is if VCs stay in companies beyond a reasonable point then they're not doing their job.
All good points. Those are justifications for VC's existence as a financial instrument. But that's orthogonal to whether retail should buy into IPOs.
Elsewhere in this thread there's discussion of VC concern regarding downstream investment/valuations, reluctance to have down rounds, etc. Clearly VCs can and will delay rounds unless they can earn a premium. It's self evident that this extends to IPOs, the last "downstream investor". Due to self selection, these IPOs will be biased toward times when the VCs judge that hype/expectations are high enough to unload at a premium. Part of their job is ensuring such conditions exist at exit, via marketing, etc.
If the early stage investors' criteria were based on startups' revenue forecasts, then yes, the metaphor would apply.
However, that's not the case. They pour the money expecting for more money to be poured in later, by others. Granted, I'm oversimplifying here, but the simple existence of such criterium is "symptomatic".
Is any business a ponzi scheme?
P.S Saying that, there is research that buying at IPO is rarely a good idea: https://www.youtube.com/watch?v=2a7qhIpxv60