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July 12, 2003

How VCs are "de-risking" their investments

Venture capital is undergoing a radical change, according to an article in Fast Company magazine. "Forget home runs -- VCs just want to hit a few singles. We're seeing the emergence of risk-averse venture capitalists. Talk about an oxymoron!" it says.

"The venture-capital paradigm that prevailed for most of modern venture capital's history is broken. The portfolio approach doesn't work today and, in my opinion, will not work for the next several years. On the whole, there will be far fewer home runs. And if you can't be sure of finding one giant winner, then you can't afford to pay for all the failures," says Daniel L. Burstein, managing partner at Millennium Technology Ventures in the article.

So, oxymoronish or not, VCs like Burstein are "de-risking" their investment bets. The objective: More moderate successes--and fewer failures of portfolio companies.

Here are a few of the ways in which VCs are going about the job of de-risking (as indicated by the Fast Company article):

* Emphasise on later stage investments--including post-public deals.

* Being "hands on" in building companies from the ground up.

* Building companies with more "sophisticated financial engineering".

* Investing in less bleeding-edge areas like security services, medical devices, and small pharmaceuticals.

* Investing in businesses that won't require multiple rounds of funding before achieving profitability.

Click Here to read the full Fast Company article.