Strong Diversification Strategy Can Thwart Grim VC Numbers

Posted by | September 2, 2010

The data from Thomson Reuters/NVCA on venture capital investing over the past 10 years has sparked an onslaught of debate and media coverage highlighting the “grim numbers” of venture capital. Yes, returns are low when compared to the trends experienced during the 1990s. However, we must keep in mind that under the right circumstances, there is still significant opportunity.

According to a report from SVB Capital, “venture capital firms have shown an ability to generate compelling returns when public markets are healthy.” Well, unfortunately the public markets haven’t been healthy as evidenced by the Dow Jones Industrial Average, which essentially remains flat from where it was 10 years ago.

Today, there is a process currently taking place within the venture and growth capital marketplace to weed out weak fund managers. They will continue to bring their current fund activity to a close and find significant challenges in raising new funds. However, stronger fund management groups should experience a greater level of opportunity to invest, and will be able to continue to attract a steady flow of capital — albeit at levels lower than in the past.

We echo SVB’s report and believe that it’s crucial to have a highly selective strategy with strong diversification across different stages (early-stage, growth equity), sector (life sciences and technology), and geography. This approach to deploying capital, along with a business model that enables Safeguard Scientifics to be a patient partner, garners a less risky portfolio.

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