Last week, the Boston Globe had an interesting article on how hedge funds were starting to invest in private biotechnology companies, investments traditionally made by VC firms. Venture capitalist, Bill Burnham discusses the trend on his blog and how hedge funds may eventually shake up the VC industry. Some venture capitalists are even throwing in the towel and starting hedge funds.
The growing trend is not that surprising considering the enormous amount of capital that hedge funds manage and their need to diversify. Instead of chasing the same public companies, private companies represent market in need of capital that still has a lot of opportunities for expansion. For entrepreneurs, hedge funds provide access to public investors and sometimes at less onerous terms since hedge funds tend to manage more funds. So far, most hedge fund investments in private companies have been limited to late-stage or mezzanine rounds. Being passive investors, it seems unlikely that hedge funds will ever migrate into early-stage investments. It will be interesting to see how the industry will evolve.