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Safeguard: There&#039s opportunity amid volatility

Officials for Internet incubator Safeguard Scientifics (NYSE: SFE) said Wednesday investing in start-ups amid the market volatility is like "buying the day after Christmas."

A volatile tech sector has left the market for initial public offerings -- and shares of Internet incubators -- in ruins. Meanwhile, the Nasdaq is currently more than 1,500 points below its 52-week high of 5,048.62.

Amid the wreckage, however, is opportunity. Safeguard CEO Pete Musser said on a morning conference call that the company is continuing to invest in startups and the flow of deals remains strong.

"The deal flow is strong, but the valuations are definitely coming down," said Musser. "Valuations are down a third to a half. It's like buying the day after Christmas at a much reduced price."

Falling valuations means Safeguard can use its $800 million in cash to buy stakes in numerous startups. "We stand ready to buy," said Musser.

Patrick Walravens, an analyst at Lehman Brothers, said incubators such as Safeguard cousin Internet Capital Group (Nasdaq: ICGE) have a big advantage in a market downturn because both have cash to invest. These investments will pay off when the IPO window reopens.

Safeguard, which reported a first quarter profit Wednesday morning, said the IPO window won't open in the near-term.

Walravens agreed. "It's difficult to say when the IPO window will open because of the market volatility," he said. "A fair amount of institutions won't even look at IPOs."

Musser said the company is funding companies that would have been able to go public just a couple months ago. In addition, early stage public companies may approach venture capitalists and Internet incubators for follow-on investments.

Musser said Safeguard's average deal size will be in the $15 million to $25 million range, but infrastructure companies may require more investment. On Tuesday, Safeguard invested $30 million in Atlas Commerce Inc., a business-to-business software company.

Future investments will focus on companies that have a clear path to profits, said Musser. Among the companies in Safeguard's stable, Musser said Mi8, PrivaSeek Inc., RedLeaf Group and TechSpace are the most likely candidates to go public -- if and when the IPO window reopens.

"In general, the frenzy is dying down, and that's a good thing," said Walravens. "Incubators don't have to aggressively chase companies that are going public too early. Incubators aren't happy about the stock prices, but are happy about the reasonable valuations."
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