Knowledge@Wharton has an article based on a panel discussion titled "Financial Perspectives on Managing Risks" at a recent Wharton conference. The panelists discussed how VCs determine which new technologies are good investments, and what strategies they employ to manage and mitigate risk.
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.
Spencer Hoffman, a principal at Safeguard Scientifics, presented another take on venture investing and risk from the viewpoint of his company, a publicly traded investment firm specializing in information technology and healthcare.
...Safeguard's model is to mitigate risk and create above-average returns by selecting the right companies in areas where the firm has expertise. Then, using Safeguard partners or networks, the company uses its own entrepreneurial experience to help build or improve the businesses. "What we try to do is bring a little bit of the buyout model to the growth equity space and look for opportunities venture capitalists won't touch because management isn't perfect or some element of the execution isn't there." Hoffman stressed that a key to reducing risk is to pay the right price and structure the terms of the deal correctly in the first place. "The real way venture capitalists mitigate risk is with the terms," he said.
...Safeguard is more inclined than other firms to let founders have some money early on, according to Hoffman. As long as a big chunk of their wealth is still in the company, he said, founders who have been able to tap into some of their equity are likely to be better managers. He argued they are less concerned about the downside if they have been able to profit to some extent from their entrepreneurial risk. "Actually I'm surprised more firms don't do this," he said. "If the owners of the firm are not concerned about paying for their children's education, either they are total risk seekers or independently wealthy with no commitment. Those are the people you want to run away from."
Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.