Tuesday, August 28, 2007

Venture Capital Forces Investment


The Wall Street Journal today announces that major venture capital investors are "forcing" universities, pension funds and foundations into racier investments in an article Venture Firms vs. Investors.

Its fun to read these headlines. This kind of article makes the front page, which if you are not involved in the industry makes you think twice about how the general public reacts to private investments on the whole.

Venture Capital is not a sure-fire means by which to make money. It is a business based on risk tolerance. Every single person who invests in a venture capital fund (like Sequoia, DFJ, Accel, Greylock, etc) or a start-up company, as a friend, family member or angel investor, inherently takes on the risk of that businesses and its business model. This is not for the faint of heart. If you want a low-risk investment I suggest looking into T-bills, bonds or stuffing money under your mattress (scratch that, what if you're house burns down?).

The theory that an $18 Billion dollar Yale University endowment is being bullied into risky investments is hilarious. There are so many investment vehicles available to these minted Ivy Leaguer's that I find it hard to fathom just how much pressure one of these venture funds could possibly be exerting on one of these behemoths. With billions in wealth there should be plenty of funds out there that are not pushing for investments in shaky portfolios which would make the University much happier.

Secondly, LPs play an important part in shaping a fund. The fact that an investment partner chooses to not trust (or in this case invest) in a fund because it is "more risky" than they are accustomed to does not mean they should be automatically allowed to invest in only low-risk venture funds. The true partners are those who are willing to take the risk in untested territory as well as in "normal" investments. The risk appetite of the investors and the managers of the fund must be in sync.

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