The great IPO rush: Never go by the big names that have invested

They invest under different conditions and often have financial motives that aren't aligned with ours

- DEVINA MEHRA

Another year, another initial public offering (IPO) frenzy. Or should I say another century, another country and another IPO frenzy? Because a mad rush for IPOs has been around as long as modern stock exchanges have existed. In 1881, there were 400 IPOs on the Paris bourse, with street sellers hawking prospectuses.

Talking of IPOs, most investors look at the names of big investors who have invested in a stock as a sign of its credibility. If large institutional investors—mutual funds, venture capital (VC) funds, foreign institutions or othershold or buy a stock, many take it as a Good Housekeeping stamp of approval.

The common investor thinks that all these institutions must have done their due diligence, and that by putting their money where their mouth is, they have already done the work, so smaller inves tors can go along for the ride.

But it doesn't quite work that way. A few pointers. There is a fundamental difference between a regular investor investing in a certain securities and a VC fund doing so.

The VC model works on the explicit assumption that most of the fund's investments will go down to zero. The ratio goes something like this: 60-70% of its investments will go to zero or near zero. Maybe 25% will make some money and 5-10% will be multibaggers, which is where the fund hopes to find the next Google or Facebook. VC analysis is from a totally different perspective from yours. You are deciding whether or not to buy a single security. But VC funds buy that security as one of a basket of securities. Their risks are spread out.