Monday, July 6, 2009

Diversified Venture Investments Still Beat Public Markets

Welcome to the new world where business plans suffer higher scrutiny, are probed for possible infusion of government capital, are examined for whether they would displace any US jobs and excruciatingly bracketed under one of the three areas the government wants to promote - energy, health care and education. The first thing to note is why someone would be interested in investing in a venture-financed business at all. One could argue that, given the current credit conditions, it is harder for small businesses to survive, as is. But, that is the beauty of venture-financed businesses. They dont depend on credit for growth and expansion - they depend on equity investments (which sometimes is so fortified that they might look like debt instruments) from investors and high net worth individual, who are adept at measuring and rewarding relatively higher risks. According to Thomson Reuters and the National Venture Capital Association (NVCA), the one year all venture Private Equity Performance Index (PEPI) declined significantly to -20.9%. Venture returns declined, in fact, across all horizons (3,5 and 10 years) and only the 20 year horizon remained in the black. While, this may look like a sad tale for the venture capital market, it is worth noting that the venture returns across all horizons outperformed public market indices, the NASDAQ and the S&P 500, through December 31,2008. The 20-year all-venture returns are around 17%, whereas the 20-year early seed VC returns are around 21% - the well-entrenched high risk, high reward position. It is pertinent to note that the 20-year return for the balanced and the later-stage VCs were the same at 14.5% each. It is clear from this analysis that investors who can gauge early stage companies successfully tend to reap better returns. It is in this context that diversification becomes important.

In a recent online presentation of opportunities available for VC investment, I was delighted to find an array of opportunities available out there for investment. The opportunities ranged from an agro-bio company in the US to a financial services data provider in vietnam to a cell phone provider who wants to enhance value-added services in Africa. As with stock picking, it is important for early stage investors to diversify their portfolios. Today's business environment is global - the opportunities to spawn small companies at standardized risk is available in several countries across the world. More so than ever, several countries and new markets have understood the importance of leveraging private equity capital to seed and grow companies.

New portals such as and allow investors to get to know about opportunities in early stage markets. More such exchanges are in the making. While the value of being an insider on Sand Hill Road in Menlo Park, California cannot be underestimated, it is also worthwhile to understand that diversified investment opportunities are being made available to more of us. An early-stage/diversely invested asset class is perhaps a good addition to your investment to your portfolio, given the prevailing risk-reward situation in the economy.

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