Why Traditional Investment Companies Are Targeting Start Ups

Why Traditional Investment Companies Are Targeting Start Ups
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Providing start-up capital for fledgling companies in their infancy has long been the realm of Venture Capital firms but following the 2009 Financial Crisis there has been an increasing trend of traditional investment firms, such as hedge funds and private equity firms, getting involved in the start up market.

Looking both for new growth opportunities and to diversify their portfolios many asset managers have decided to take VC firms head on by offering more favorable terms to young start ups.

Why Traditional Investment Companies Are Targeting Start Ups

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For better or worse most of the world’s cutting edge technology companies are located in few hot beds, including Silicon Valley. One of the key reasons activity has been focused in such hot beds is the ability to access capital in the locales, which has traditionally been provided by a Ventura Capital firm. Venture Capital firms provide Start-up funding in exchange for equity, usually between 8 and 15 percent. VC’s usually ask for ability to provide input and occasionally make changes within the company itself

As of late, however, many VC firms have been getting cold feet after flops on IPS for Groupon Inc (NASDAQ:GRPN), Facebook Inc (NASDAQ:FB), and others. Luckily for cash strapped start-ups, traditional investment companies are increasing their investments.

While the reasons for individual asset managers are various the continued instability in the world economy and uncertain returns on traditional investments seem to be a major driving factor. The property market in the U.S. still looks abysmal and many investors are questioning the stock markets, even though they are reaching record highs.

In fact, with the global economy itself so unstable and unemployment rates so high, many people are wondering whether the stock market itself is forming a bubble fueled by cheap cash from the Fed and overly optimistic investors.

These sentiments are likely fueling the drive of traditional investment companies into the Start-up market. If a Start-up company succeeds the profits can be tremendous but the risks are also high. The risk on Wall Street and in other traditional markets is also high at the moment, however, and at the very least Start-ups offer a chance for diversification. Further, even should another global downturn occur the impacts on investments in Start-ups will be less severe as most will not being going public, or even reaching the end of the commercialization process, for at least a few more years.

Not only that but technology Start-ups almost always center their business activities on cutting edge technologies that will improve efficiency and lower prices for consumers. As a result their product line-ups are often more resilient to global down turns. While a car company, such as General Motors Company (NYSE:GM), will almost certainly see sales dip during a recession, a tech company such as Noodle, an online education company, may still be able to maintain growth and profits.

The move of traditional investment vehicles into Silicon Valley and other hot beds is being warmly greeted by most Start-ups. Investments from VC companies dropped 15 percent in 2012 to 29.7 billion dollars and are now near the levels seen before the Financial Crisis.

Not only that, many traditional investment companies are offering better terms. Hedge funds and their kin have more money to throw around and have shown a willingness to pay top dollar, often 20 percent more than their VC peers, in exchange for equity.

If nothing else, traditional investment companies will pressure venture capital firms to step up their game. With the global economy still largely stagnant outside of Asia the world could use another round of successful Start-ups to spur another tech revolution. And increased funding for said Start Ups increases the chances that it could actually happen.

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