Mouths that salivate every time a new high-tech IPO feeds millions into the pockets of executives and venture capitalists will certainly stutter with excitement as private investors are invited to try their luck with shares in VC funds sold online.
Smaller moneybags-types who want to drop as little as US$1,000 into a VC fund will find it easier to do so in a few weeks, once San Mateo-based Technology Funding gets approval from the National Association of Securities Dealers, said Technology Funding partner Tom Toy. Late Wednesday, the company got the go-ahead from the Securities and Exchange Commission to sell shares in a new fund over the Internet, he added, emphasizing that the Net sales are a first for VC funds.
Publicly traded VC funds have been around for years, but investors could trade out of their shares as they would stock in a public company. Technology Funding's new fund ties investors into the funds as venture capitalists are. The shares won't be traded on a secondary market. That commitment means bigger risks, but also the promise of better returns.
"We've seen how institutions have participated in VC funds," Toy explained. "We think we're going to allow the private investor to participate in the next generation of Silicon Valley success stories."
Venture capital funds - considered high risk and extremely illiquid - traditionally haven't been made available to individual investors, except for the few who can afford to have their money tied up for a decade at a time and can accept the possibility of losing. From the venture capitalist's point of view, it hasn't been cost-effective to administer funds with thousands of small investors.
Technology Funding has apparently eliminated enough expenses to make the plan feasible. It sells shares in the fund not through brokers, but via online credit-card transactions or electronic checks, using the technology that allows direct deposit of paychecks.
"It's great that they're opening this up to common investors," said Warren Packard, an associate at Draper Fisher Jurvetson. But concerns remain that some of these common investors may not be aware of the details and risks involved.
The fund will not mature for 10 to 14 years and may not provide any return on capital for 6 or 7 years, Technology Funding says. The company says it will spell out the risks and obligations to its clients, and has set a limit on how much private investors can commit to the long-term funds.
"We'd like people to invest in this fund the way institutions do, with about 3 to 5 percent of their assets," Toy said. The company has set a ceiling for investment in the fund at 10 percent of a person's assets and will ask investors to read its prospectus and sign an agreement pledging that they understand the risk.
But the required "signature" is no more than a click on a box - not unlike the routine agreement "clicks" to signify acceptance of software licenses and other online transactions, and there is no real verification of the portion of a person's assets being committed. While there is some concern that unknowing investors - seduced by the high-tech moneymaking hype that pervades today's business media - will drop more bucks than they should into the deal, the possibility isn't exactly causing panic.
"It's hard enough to get people to buy a CD online," argued Nicole Vanderbilt, analyst at Jupiter Communications, who thinks it's unlikely that anyone will invest their life savings online. "This is more like a novelty or curiosity item for technology-savvy consumers," she added.
If there is a market for these shares, it's likely to be among high-tech types who already manage their own investments online, and who analysts figure are at least somewhat knowledgeable about venture capital - and will check out Technology Funding's record before feeding it wads of cash.
"Typically the venture industry has provided higher returns than most other investments" such as stocks and real estate, said Steve Jurvetson, managing director at Draper Fisher Jurvetson. He said there has been a demand to get private investors in on all the bucks being made, but that the SEC has been resistant. "We'll probably see more creative approaches [to private investment in venture capital funds,]" he added, which could be a good thing, since "presumably it will make you more money than other things."
Jurvetson hopes that in time, as SEC regulations change, more private investors will be able to take part in VC funds - and skip experiences like his one. Way back when, before he was a VC himself, he called a few firms looking to invest in their funds and "was pretty much laughed out of the room," he chuckled.
