Fun with Venture Capital
The Playground of High Risk Investing
By Kara Stefan
 So
you’ve built a conservative foundation with your investment
portfolio and yearn to take on something of a more speculative
nature. In the past year, you’ve probably heard a lot
about the explosion of initial public offering (IPO) stock
prices as they enter the market. But more recently, a new
type of investment has entered the radar of mainstream investors.
Riskier and potentially even more rewarding than IPOs, venture
capital (VC) is money collected from private and institutional
investors and made available to provide startup businesses
with exceptional growth potential.
Often the managers in charge of VC funds will partner with
the new business owner to provide managerial and technical
expertise. It’s basically a way to stay hands-on with
their money and ensure that the business becomes a success
so they get a return on their investment.
Then there are what’s called angel investors, who are
more hands-off individual investors who invest in startups
that are typically too small to require venture capital funding.
The angel market generally seeks investments in the $50,000
to $500,000 range, and many angel investors are successful
former entrepreneurs who want to help other entrepreneurs
grow their businesses.
VC and the Mainstream Investor
While the VC market has come a long way towards being more
accessible to the average investor, it’s still got a
ways to go to be a truly affordable investment. Up until a
few years ago, VC investors were expected to ante up millions
just to be part of a startup deal.
But new online technologies have changed all that, streamlining
operations and creating a more efficient way of bringing VC
investors and entrepreneurs together. Today, you may participate
in the VC market with minimum investments ranging from $25,000
to as low as $5,000.
However, while minimum participation amounts have dropped,
the Securities and Exchange Commission’s (SEC) requirements
have not. To become a VC investor, you must meet the SEC’s
criteria of an “accredited” investor, meaning you
must have either:
- $1 million net worth, or
- An annual income of $200,000 or more over the past two
years ($300,000 for a married couple).
Sophisticated Investment
Why is the SEC so strict about who gets to invest venture
capital funds? Because VC is not for the weak-hearted or inexperienced.
While pre-IPO companies offer much more upside potential than
publicly traded companies, their business models are not proven
and they have no track record.
The SEC reports that for every 10 businesses funded by VC,
7 or 8 will fail or--at best--not turn a satisfactory profit.
Research into these new startups does not come easily, either,
since the SEC doesn’t require private companies to disclose
the kinds of financial data that public companies must report.
VC Success Rates
Mainstream interest in venture capital has become more widespread
recently, given the success of so many dot coms. Over the
past two years, venture capitalists have witnessed returns
of 100% or more on their investments, with turnaround times
on profits as little as 18 months.
Traditionally, the VC market has averaged 20% returns (at
least over the last 10 years), with the typical turnaround
time closer to 5 years. Like long-term investing, VC investors
must be patient and frequently have no idea how their investment
is progressing.
To invest in venture capital, you really must have money
to burn. You need to have a substantial investment portfolio
in hand with assets left over in the kitty that you can afford
to lose. That’s because venture capital investing generally
requires so great a cash outlay that the average investor
cannot afford to diversify by holding several different deals--the
most common approach for reducing investment risk.
Where to Start
Fortunately, with the Internet, you’re already plugged
into the greatest resource of VC deals and information. To
further your education and explore what the VC industry has
to offer, check out the following Web sites:
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