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When to get in and out of venture capital

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With startups routinely raising hundreds of millions of dollars from tech investors, the landscape of venture capital has changed significantly.

Now, even big mutual fund firms like Fidelity are investing before companies go public in an effort to capture the early upside. So what does this mean for venture firms? At the LP Outlook on Investing in Venture and Tech panel at SuperReturn US East this week, delegates said they're working around the venture tourists by focusing on risk and niche areas of tech.

"One of the big things that investors don't understand is that modern portfolio theory measures investment volatility as risk and that's stupid for venture," explained Chris Douvos, managing director, Venture Investment Associates from the stage. "Of course there is going to be volatility in these investments. When you look at risk in startups you have to look at what you can mitigate and what you can't. I'm not concerned about volatility, I'm concerned about whether a new CEO is going to write a stupid memo about rules for a party in Miami."

When to get in

Understanding the real risks of any early stage investment has helped firms like Venture Investment Associates prevail over late comers to the space. But, high valuations mean that even the best venture firms have had to adjust their strategies slightly.

"High valuations mean that even the best venture firms have had to adjust their strategies slightly".

"We are starting to get in earlier if it's appropriate for us," said Steven Yang, executive director at Adveq Management AG. "We may go further downstream and invest throughout the growth process rather than waiting for companies to get to a level where they have in the past. That way we can pick up the upside as companies grow."

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Morgan Webber, a partner at Adam Street Partners agreed with Yang. "We have essentially always focused on early stage investments, but there are different points where you can get in if you understand the industry and you are confident in the management team."

In some cases, learning names and faces well before they are CEOs can be helpful. "I am a seed investor and I have been in the past so going earlier isn't really possible for me," Chris Douvos joked from the stage. "But, that said, I do spend a lot of time at universities trying to get my arms around what's coming out of research labs to get a sense of what the new technologies are going to be. Then in a few years when you see a pitch you already kind of know what's going on and who has been involved."

Panelists agreed that focusing in on nascent, not just emerging technologies can give seasoned venture investors an edge over newcomers. "We here a lot of people talk about machine learning, but there aren't many investors that can really take you through what it means," said Webber. "Right now we're looking at deep insight machine learning in healthcare for example. There aren't a lot of people looking at it, but we think it could be a breakthrough area."

Using machine learning for healthcare automation was a key area for all three panelists. They cited examples including using machine learning to analyze medical images and patient population patterns.

When to get out

Beyond understanding risk and bleeding edge technology, a good VC knows when to get out.  "I think we've seen a lot of companies lately miss their window," said VIA's Douvos. "It's fashionable to stay private and keep raising money as needed but, there's a window to go public and missing it can be damaging to the company. You have to think about the decisions of the CEO at that point."

Keeping an eye on asset flows is also important, according to Adveq's Yang. "There is a significant pool of capital allocating to venture right now," he said. "This could have a profound impact on the industry if it keeps going up, if it's undisciplined money."

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