Tuesday, March 03, 2009

Focus or Diversify? For VCs, Why Not Both?

What to make of the new €350 million fund raised by Index Ventures? That the firm's LPs apparently like focus, except when they don't.

Index's Index Ventures V is billed as an early stage and seed fund and is the fifth such fund the venture firm has raised in the past ten years--clearly Index is on to a winning formula with its emphasis on the very early stages of company formation and development. The firm has been consistent in its fundraising--no small feat these days. Index Ventures IV was raised just over two years ago and also topped out at €350 million.

But not too long ago Index decided it wanted to invest in later-stage opportunities as well. Not wanting to diminish that early-stage focus in its existing funds, it decided to raise a separate fund for those more mature investments in early 2008: Index Ventures Growth Fund (IG).

To date, IG has invested in two biotech companies--both of them public. Last week Index announced it was an investor in the recent $24.3 million Ariad PIPE deal and in 2008 it co-led Micromet's $40 million PIPE as well.

That's a slightly different twist than what many other venture outfits are doing these days. It's no secret that VCs are attracted to the public markets given the beating publicly traded biotechs have taken in recent months. (Valuations of private companies by comparison still look sky high.) But most VCs aren't choosing to develop a separate fund for such investments, instead committing money already raised as a diversification strategy. Call it one version of venture's Plan B.

But if Index's two funds allow for focus--late-round investments and PIPEs versus seed and starter rounds--there's also plenty of room for diversification. That's because Index's funds invest across life sciences, high tech and clean tech, by no means an odd or niche strategy but one not as popular as it once was. Like other diversified funds--say, Polaris Ventures' or Interwest's--Index has been spread across multiple sectors for some time and has a loyal LP following. Today's announcement notes that Fund V was raised "almost entirely from the firm's existing base of limited partners."

Those partners likely appreciate the variations in risk, return and business models between, say, cleantech and biotech, especially in today's awful economic climate. Maybe it's best not to have too many eggs in one basket, even within a particular fund.

image by invivoblog.

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