Riddle me this: What do hedge funds and steroids have in common? Both have undercut the significance of breaking long-held records, first in baseball (See Barry, above) and now venture capital.
The slew of venture capital surveys this week reported impressive totals for health care companies. In each case, biopharmaceutical and medical device companies finished the first quarter with record totals.
Why? The general press says investors finally have recognized that baby boomers will benefit from new technologies being developed by the companies. Yeah, well, most informed folks recognized that a very long time ago. But what’s really going on are hedge funds, private equity players and venture capital firms that are morphing into one or the other are pouring big bucks into companies with products, revenues and a legitimate shot at going public in one or two years because public investors are eagerly buying into these companies.
This is venture capital today, and there’s nothing wrong with that. This isn’t a traditionalist rant pining for the old days of day games, the reserve clause and start-ups built around pre-clinical products. But what’s off-putting is when venture capital counters include financings like the $110 million raised by CardioNet Inc. into the figures. In that case, a syndicate of hedge fund investors put up significant capital in exchange for discounted shares in the company’s pending (they hope) IPO. (For more complete terms see article in your April Start-Up.)
If the company goes public—and it should file this year—it’s a great deal for the company and its venture investors. But should deals in which public investors are pouring huge dollars into privately held companies simply to obtain the right to buy cheaply into an IPO be counted as a venture capital investment? Probably not. Should they be banned from venture capital figures just as steroids have been banned finally from major league sports? Hard to say. But just as Barry Bond’s assumed steroid use is tainting his charge to be the all-time home run king, big-ticket financings backed by hedge funds with their eyes on IPOs skews the record fund-raisings of today when they’re matched against years past.