The spate of early-stage companies turning directly to the public for funding presents the eager investor with a tempting chance to "get in on what the bankers usually keep for themselves" -- pre-IPO stock.
The Securities and Exchange Commission has opened the door to everyone for online investment in venture capital funds. It granted Technology Funding Inc., of San Mateo, Calif., the ability to sell shares in its new fund over the Internet.
If you're looking for a taste of the Wild West, this kind of investing is for you. The launch last month of Wit Capital Corp., founded by the guy who floated the first Internet public offering a couple years back, gives would-be venture capitalists a taste of startup investing.
But before you decide to go into this quick-draw contest, open your eyes wide and learn a few tricks of the trade.
Venture capital is dangerous work for investors with very thick skins. There are some folks who are very good at it. Then there are a lot of clowns who want to be, but never will be, good venture investors. When you invest in young companies in immature industries, you're offering to pay for a lot of mistakes, a boatload of experimentation, and, if you're lucky, some genuinely brilliant innovation.
Let's take Technology Funding, the company selling VC shares on the Net, as an object lesson. The firm is not a star, but it's got a solid record of moderate success. At a minimum investment of $1,000, the Technology Funding option is an interesting, though not necessarily good, way to diversify into high-risk investing.
Where you put your money as an investor will make all the difference. Study the funds run by the firm you'll invest in. Did at least 20 percent of the companies in those funds succeed? Did they make sense as investments or did the fund appear to invest on the basis of what was hot at the time? Good indicators of the invest-by-trend phenomenon are funds containing interactive television or Web search engines investments.
Look for fund managers with background in the real world, not just in banking. A VC with management background has far more to contribute to an investment portfolio company on your behalf. As an investor, you want to provide not just your money, but the intelligence and experience that will keep young companies out of trouble. Really great venture investors deliver connections, deal-negotiation savvy and management insight.
All the information you'll need to make these judgments should be in the prospectus on the Internet site. Technology Funding's site includes descriptions of its past funds and a long prospectus about the new fund.
It's a model of the way this information should be delivered, except that it doesn't make explicit comparisons between projections about the new fund, like the statement that it "has the potential to appreciate at a rate of 50 percent or more a year" and the performance of past funds, which have not provided those kinds of returns on average. In fact, most VC consider a 40 percent return over 18 months a phenomenal success.
So, forget all the happy talk when considering the VC route for your money. Ignore the suggestion that investing-by-Net is so much more efficient than other routes, ensuring a higher return -- the real costs of investing in VC funds are the cost of the managers. Just ask yourself, "How much can I lose?" Talk to your investment adviser. Don't toss a money into an Internet VC fund simply because you can.
Mitch Ratcliffe is president of Internet/Media Strategies Inc. (www.ratcliffe.com), a Tacoma, Wash., consultancy. He can be E-mailed at firstname.lastname@example.org. And, yes, he has played a venture capitalist on television.