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Private Equity Strategies

Insiders View: Venture Capital Investments Have Changed Slightly, But Still Provide Value

Tuesday, July 23, 2013

By: Bailey McCann, Private Equity Strategies

Since its consolidation, venture capital has had a hard time gaining traction with investors. Following the crisis, many were wary of making investments that come embedded with a significant, if not likely, blowout risk. Yet, veterans in the space say that dealflow is strong, and opportunities abound.

It may not be the go-go years of the 1990s internet boom, but some VC transactions are still making waves. What’s bubbling below the surface is how those transactions have changed. Instead of building the internet as we know it, VC funding is now going to niches and disrupters like Air BnB or Uber, which turn common services like hotel bookings or hailing a taxi into peer, based transactions.

VC investments too, are smaller as new technology has enabled super lean startups to qualify for VC attention. Larger investors in the space note that they’re looking at smaller funds that make investments on the order of thousands of dollar investments in many companies instead of million dollar investments in just a few.

Hall Capital is one of those investors. They’ve been in the VC space for a number of years as part of their overall interest in private equity. Hall Capital is an outsourced CIO with approximately $25.1bn under management, $10.4bn of that is in alternatives. The firm builds global multi-asset class investment portfolios for families, endowments, and foundations and provides a platform of pooled vehicles.

“With the low cost these days of starting a new technology company, the challenge with venture investing is fund size. We have been investing in recent years with smaller funds that are better able to target small seed stage investments,” Rachel D. Kort, managing director and member of Hall Capital’s Portfolio Management practice, tells Private Equity Strategies.

Despite taking a fairly conservative stance when building their portfolios, Hall Capital still sees value in venture capital.

"We expect a lot of portfolio companies in seed investing and VC to return zero, but we see significant value in the few successes,” says Simon Krinsky, Director of Portfolio Management at Hall. “"With seed investing, like many VC strategies, you make a number of investments and you expect that probably only one or two will be very successful and end up making the fund."

He notes that in order to realize value now, investors have to make the right size of investment at the right time, based on proven, fundamental venture strategies. That may look like a $200,000 investment in an unproven company, rather than waiting to make a $2 million investment when it’s more developed. “In the US we've gone back to emphasizing seed and traditional VC investments over large and mega-buyout strategies, balanced against some later stage funding, particularly in the emerging markets."

This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.
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