IPO Mania and the Illusion of Big-Name Investors
They invest under different conditions — and often have financial motives that don’t align with retail investors.
Another year, another Initial Public Offering (IPO) frenzy. Or perhaps another century, another country — and yet, another frenzy.
IPO mania has existed as long as modern stock markets have. In 1881, there were 400 IPOs on the Paris Bourse, with street hawkers selling prospectuses to eager investors.
The Big-Name Investor Illusion
When investors see large institutional names — mutual funds, venture capital (VC) firms, or foreign institutions — buying a stock, they often interpret it as a seal of credibility.
The common investor assumes that these institutions have done all the due diligence, so following them seems safe.
But it doesn’t quite work that way.
There’s a fundamental difference between an individual investor buying one stock and a VC fund investing in a portfolio of companies.
Understanding the VC Model
The venture-capital model operates on the assumption that most investments will fail. Typically:
60–70% of investments go to zero or near zero.
Around 25% return modest profits.
Only 5–10% become multibaggers — the likes of the next Google or Facebook.
VCs diversify risk across many bets, whereas a retail investor often makes a single, concentrated decision.
As we’ve seen with companies like WeWork (US), Housing.com, and Byju’s (India), even marquee VC names often miss red flags — from governance lapses to execution failures.
Relying on them for your investment conviction can be a costly mistake.
Are You Buying at the Same Price?
In almost every major IPO, institutional investors get in much earlier and cheaper.
For example, IPO pricing is often 2–8× higher than the valuation at which VCs invested in the last private round, sometimes just months prior.
In India’s 2021 new-age listings — Zomato, PolicyBazaar, Nykaa — IPO valuations were multiple times higher than their last private funding round.
The recent Lenskart IPO came at nearly eight times its previous valuation.
The lesson: your entry price may be the institutional investor’s exit price.
Offer for Sale (OFS): Whose Exit Are You Funding?
If the issue includes an Offer for Sale (OFS), institutional or VC investors are selling their shares.
That means the IPO price is their exit, but your entry.
You, the common investor, are providing them an exit — not joining them in an entry.
This is a crucial distinction often overlooked amid IPO hype.
The Anchor Investor Game
Then there’s the anchor investor category — mutual funds and large institutions that get firm allotment before the IPO opens, buying at the same price as retail participants.
Even in clearly overvalued IPOs, the anchor list often looks glittery and impressive.
But dig deeper:
Most invest tiny amounts, around 0.1–0.2% of their total equity AUM.
Their motive? Visibility, access, and relationships, not conviction in valuation.
From an investment banker’s perspective, anchor allocation can become a quid pro quo system.
When there’s a scramble for hot IPOs, investment bankers may pressure funds to take token positions in weaker ones — in exchange for better allotment in upcoming high-demand issues.
This dynamic misleads retail investors, who see a list of prestigious names and assume it signals confidence.
In reality, it can be a strategic gesture rather than an endorsement.
Why Regulation Is Needed
This anchor-allotment system is ripe for regulatory review, as institutional participation is often used as marketing bait for smaller investors.
By lending their names to overpriced issues, institutions indirectly amplify retail risk.
The Investor’s Golden Rule
Never be blinded by who is buying or who is endorsing a stock.
Every investor — retail, institutional, or venture — operates under different incentives, horizons, and risk profiles.
In markets, credibility is not contagious.
Caveat emptor — Buyer beware.
Or, as modern investors might put it: Do your math before joining the hype.
For clear, data-driven insights on IPO valuation metrics and institutional behaviour in capital markets, follow thought leadership by Ranjit Jha (CEO) — known for demystifying India’s investment and wealth ecosystem.
To learn how to assess IPOs beyond headlines and anchor names, connect with Rurash Financials — experts in investment research, portfolio advisory, and primary-market strategy.