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Venture Capital: Hedge Funds Get Active in Financing Start-Ups
By Rebecca Buckman
Apr 24, 2006

Hedge funds helped to finance some of the biggest venture-capital deals in this year's first quarter, another sign of the frothiness in some sectors in the start-up investing market.

The involvement of hedge funds also reflects the need for young companies to raise larger amounts of cash to sustain them until an initial public offering or a sale of the business.

"The capital markets have said they want big deals," says Joseph A. Muscat, a partner with Ernst & Young LLP in Palo Alto, Calif., who heads the firm's U.S. venture-capital practice.

Hedge funds, loosely regulated investment vehicles, often pony up more cash for stakes in private companies than venture capitalists are willing to offer. They typically invest in publicly traded securities, currencies and derivatives, though some lately have been doing more lending and making other, less-liquid investments -- including investing alongside of venture-capital firms in start-ups. Hedge funds also got active in venture capital during the short-lived technology- stock boom of the late 1990s.

The start-up that raised the most money during the quarter -- youth- oriented wireless firm Amp'd Mobile Inc., of Los Angeles -- snagged $150 million from several venture-capital firms and four hedge funds, an Amp'd spokeswoman said.
Statistics on the quarter's venture deals, to be released today, were compiled by research firm VentureOne -- an industry tracker owned by Dow Jones & Co., publisher of The Wall Street Journal -- and Ernst & Young. Overall, the median size of U.S. venture-capital deals in the first quarter was $7.5 million, up from $6.8 million in last year's first quarter, according to VentureOne and Ernst & Young. The $7.5 million was the biggest median deal size recorded since the fourth quarter of 2000.

What's more, the total amount of money committed to venture-capital deals in the first quarter, $6.02 billion, was the most since the first quarter of 2001. The first-quarter figure was up 18% from the $5.1 billion venture capitalists invested in last year's first quarter.

Later-stage deals, involving bigger, more mature companies, accounted for more than half of all venture money committed. That partly reflects the huge amounts of money venture capitalists have raised from investors lately.

"They want to put that money to work, and it's easier to do that at a later-stage company," says Daniel H. Ahn, a managing director at the Woodside Fund in Redwood Shores, Calif. Some investors, however, worry that all that money is chasing too few good deals, and will result in lower investment returns.

Deals were classified as venture-capital financings even if hedge funds contributed some money, a VentureOne spokeswoman said. Venture- capital firms typically invest in small- to midsize private companies, hoping for a return later through a sale of the company or a public stock offering.

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