Final answer:
Very small companies tend to raise money from private investors instead of through an IPO due to costs and regulatory requirements, while small, young companies often prefer an IPO for quick capital raising and market visibility. A venture capitalist has better information about a small firm's profit potential due to thorough due diligence.
Step-by-step explanation:
Regarding the first question, very small companies tend to raise money from private investors instead of through an IPO because the costs and regulatory requirements associated with an IPO can be too burdensome for small companies. Private investors often have a higher risk appetite and are willing to invest in these early-stage companies.
In answer to the second question, small, young companies often prefer an IPO to borrowing from a bank or issuing bonds because an IPO allows them to raise a large amount of capital quickly. It also provides them with more liquidity and visibility in the market.
As for the third question, a venture capitalist typically has better information about whether a small firm is likely to earn profits. This is because a venture capitalist conducts thorough due diligence and actively engages with the management team, whereas a potential bondholder may rely more on publicly available information.