VCs Dabble, Dither & Diversify

The Wall Street Journal has an interesting article about how “with their core business in shambles, some venture capitalists are
changing their stripes, styling themselves as investors in distressed assets and public companies.”

Here’s why:

Start- ups today take a median 6.6 years to go public or get sold, up from 5.4 years in 2005, according to research firm VentureSource. Through the first nine months of 2008, venture funds lost 4.3%, according to Cambridge Associates. Those figures don’t take into account the severe decline in asset values since mid-September.

For limited partners, the investors in Venture Capital funds, this is proving a little worrying. One asset manager commented in the WSJ that “Traditional venture capitalists work with young private companies and they should stick to that niche.” It is a little odd that if a company with a platform technology wants to exploit it outside their initially defined area then their VCs will get rather shirty with them, but it seems perfectly OK for VCs to start dabbling in things outside their own core competence.

My feeling is that this is just the beginning, and the traditional dividing lines between venture capital, hedge funds and even banks will become increasingly blurred as a result of both the current financial meltdown and the impending new regulations on both sides of the Atlantic. Taking an existing structure such as a venture capital find and tacking a bit of distressed asset financing or PIPES (private investments in public equities) onto it is like fixing a broken windowpane with some masking tape and brown paper.

What is needed is a more joined up policy that can help unleash the technologies that we, as taxpayers, have already funded through the academic system, and get this out into the wider economy.

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