Though I cannot recommend venture capital as an investible asset class, I can distinguish between different investment vehicles. My lack of enthusiasm for venture capital comes from experience writing business plans, helping run a business plan competition, and listening to scores of talks by venture capitalists. I can honestly say that despite all my experience, none of my doubts have been assuaged.
Despite my reservations, it is clear that not some venture capital investment vehicles are worse than others. Which are the least bad?
Investment in IPOs: Jumping in when the company goes public is a bad idea that underperforms buying shares in existing companies because the IPO markets are over-hyped and over-priced. You are better off buying shares in existing, publicly-traded companies in the secondary market than you are buying from an investment banker.
Angel investing: Angel investors invest in entrepreneurial ventures directly by giving entrepreneurs money. This is an undiversified, often unproven black box and I couldn't recommend it. You would be relying on the character of the entrepreneur for repayment and your own due diligence. You would be better off buying an index fund and slaking your appetite for new ventures by watching Shark Tank on television.
Crowdfunding is a reinvention of angel investing in projects that are posted online. If you cannot live another day without being an angel investor, consider these sites. They tend to have lower buy-ins, so you will lose less money. Spend as little as possible.
Venture capital funds: Individual investors band together by giving their money to venture capital fund managers (VCs). The VCs find new ventures to invest in, and presumably know what they are doing. (I have no evidence to support that they know what they are doing.) Many of the VCs are former entrepreneurs or have histories of selling firms at prior funds.
This experience is less useful than it sounds since much of success is luck and even the most experienced serial entrepreneurs only have a small number of successes under their belts. Taking a company from launch to IPO or acquisition takes many years and many failures. As such, even legends like Steve Jobs only racked up a few big wins. As human beings we do not live long enough to create track records of enough successfully launched and sold companies to distinguish luck from skill.
Publicly traded emerging technology funds: If you are dead-set on investing in emerging technology companies, be savvy about it. Many closed-end funds afford an opportunity for retail investors to participate in these ventures.
One fund which focuses on emerging technology investments is the RENN Global Entrepreneurs Fund (RCG) currently trades at a 27.78% discount and charges 5.47% in fees. This closed-end fund concentrates its holdings on nano cap, publicly traded tech companies. The fund uses a variety of instruments to invest in these firms including equity, convertible debt, warrants, and debt.
Another such fund with attractive attributes is the Firsthand Technology Value Fund, Inc. (SVVC) is a closed-end fund which currently trades at a discount. The fund adviser charges 2% of assets in fees. A recent 8-K filing stated that Yelp and Facebook were among the fund's top five holdings and that the net assets were $84 million as of December 31, 2011. At a market price of $22.82 per share, its market capitalization is $77 million, a discount of 8%.
The fund's most recent 10-Q filing covering the period ending September 30, 2011 illustrates how management prudently hedges market risk by purchasing put options on the PowerShares QQQ (QQQ) Nasdaq 100 index fund. Most of its holdings are cash and cash equivalents.
Venture capital might be best left to the professionals. If you can't resist, spend as little as possible and consider RCG, SVVC, and croudfunding as ways to participate. Don't expect your capital to return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.