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Searching for the "Google" of Clean Tech? Diversification is Key

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The National Venture Capital Association recently released data for 2008 venture capital investments.  Venture capital firms invested $28.3 billion in 3,808 companies in 2008.  This represents an 8% decrease in dollars and a 4% decrease in deal volume from 2007.  

One big bright spot is clean tech.

Venture capital firms invested $4.1 billion into 277 clean tech startups in 2008, a 52% increase from 2007.  Popular investments include solar, biodiesel, nuclear energy, and battery start-ups.

When we step back and try to view these investments over the long-term, it becomes clear that only a handful of these start-up companies are going to become extremely successful.  Only a few of them will dominate their marketplaces and become the "Googles" of solar, wind, water, and biodiesel.

While the majority of individual investments into start-up companies will fail, the asset class as a whole has historically produced superior returns to most other alternatives.  Seed stage and early stage venture capital investing has achieved historical 20 year returns of over 20%.  The asset class as a whole is only able to achieve these returns by investing in a handful of "home runs" -- the startups that grow to be multi-million and billion dollar acquisitions and IPOs.

Despite what the admittedly brilliant minds on Sand Hill Road in Silicon Valley would have us believe, it is nearly impossible to predict which of the hundreds of thousands of promising new companies launched every year will become the "next Google" of their industry.

That's why diversification is a critically important "best practice" for successful venture capital and private equity investing.  As such, the investor's goal should be to aggregate positions in several promising early stage companies in order to improve the chances of finding that "Black Swan."

And as the public stock markets take a beating, real estate continues its downward spiral, and cash is endangered by the long-term threat of inflation as a result of record U.S. government deficits, we at Growthink believe that the early stage private equity asset class is among the most attractive long-term investment alternatives available to qualified investors.

To learn more about our perspectives on this subject, we welcome you to attend our webinar:

Webinar: Keys to Successful Private Company Investing

To register, click here: http://www.growthink.com/livedeals
 


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Ceylan says

I came across a great blog article written by a CleanTech VC who commented on this topic. According to Steve there is "little or no change here from how VC’s have always operated." He also gives a useful economics lesson of VC life: http://blog.cleantechies.com/2009/01/12/its-venture-capital-jim-but-not-as-we-know-it/
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