Question

In: Accounting

Should investors who made money from “investing” with Madoff be forced to give up their gains...

Should investors who made money from “investing” with Madoff be forced to give up their gains to com- pensate those who lost monies

Solutions

Expert Solution

How do investors make money from investing in start ups, besides typical exits (IPO or acquisition)? What if the company doesn’t want to go public or be bought? Do investors receive a share of profits? Who decides this?

Realistically, an exit is the only way for professional financial investors to make money from investing in a company.

Investing in early stage, pre-profitable companies is risky. Very risky. Off the charts risky, as a matter of fact. Since most startups fail completely, all of the returns an investor makes from his or her entire portfolio typically come from a very few "home runs". And because it's impossible to tell up front exactly which of the companies will be the home run (otherwise, of course, those are the only ones in which you would invest!), it means that all of the companies in an early stage portfolio must at least have the possibility of becoming that home run.

Therefore, seed and early stage investments are typically only made into companies that can reasonably (or, at least, plausibly) be expected (or, at least, hoped) to return 10, 20 or even 30 times the original investment. And this happens only when the equity that the investor originally purchased can be sold to someone else, either in an acquisition or in the public markets after an Initial Public Offering.

Realistically, an exit is the only way for professional financial investors to make money from investing in a company.


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