Hedge Funds as VCs

There is a silly article in Wednesday’s Wall Street Journal about hedge fund incursions into venture capital. Sure, it happens, but it’s rare, and largely self-limiting to later-stage companies.

After all, hedge guys are way too impatient and capital-rich to mess with early-stage management-less outfits. In those places their “here’s the check, call me at the IPO” approach would just be a way to squander money. Sure, it’s “relaxed”, as writer Buckman says, but it’s also dopey.

So why does the author spend so much time on this nonexistent issue? Largely because of one anomalous deal — Pay By Touch — a year ago, where the firm raised $130mm from hedge-ies. It proved her thesis, so off she went, never questioning how limited the phenomenon is, despite only citing a few examples, all of which involved companies raising prodigious amounts of money.

Related posts:

  1. Nassim Taleb, the Titanic, and Hedge Funds
  2. Hedge Funds as the Next VCs
  3. Hedge Funds Work Worst When You Need Them
  4. Hedge Funds & the Technology Bubble
  5. The IMF, Donald Rumsfeld, and Hedge Funds

Comments

  1. Bill Burnham says:

    Hi Paul, I actually think the article is dead on. I don’t think hedge funds are going to take over the VC business but they are definitely going to become an important player, especially at the late stage. Just look at what has happened in the buyout space. There are a lot more hedge funds doing VC deals these days than you might imagine and with all the capital bottled up in these funds it’s only a matter of time before that money starts to diffuse into VC. I don’t see how it’s silly of the journal to highlight an emerging trend, isn’t that what they are supposed to do?

  2. Rita Macdonald says:

    So Bill is Celsius Capital going after Hedge Funds for some of that “easy money”?

  3. Jason Wood says:

    Paul,
    While the article didn’t do a great job of making the case beyond the one PayByTouch example, it is FAR more pervasive than you’re indicating. I know of several NY-based funds that are clamoring for more direct venture investment, and have had conversations about this phenomenon with other fund managers with growing frequency.

  4. Baffling then, because I’ve seen little of it on the west coast. And what’s more, even if I were to see more it makes little sense to me. You could hardly be further apart, in financial genetics terms, than venture investing and running a hedge fund.

  5. Bill — I guess I just don’t agree that it’s a trend. Sure, there may be some of this at the margin as hedge fund managers fish in new pools, having run out of easy arb opportunities in core markets. But that is not the same thing as saying that this is anything other than a transient toss of the hedge-ie asset allocation die.

  6. Cem Sertoglu says:

    One reason hedge-fund money in startups seems rare may be the fact that hedgies are less savvy (or concerned) with effective PR on their investments.