| BUSINESSWEEK ONLINE : MAY 22, 2000 ISSUE | ||||||||
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| COVER STORY
Being a Venture Capitalist Is Getting Easier A handful of sites on the Web are lowering the barriers Wayne Marshall, 57, keeps the bulk of his nest egg in such blue-chip growth stocks as America Online, Cisco Systems, and Wal-Mart Stores. But when he retired last year from his job as a marketing manager for DuPont and took up investing as a hobby, Marshall found himself yearning for racier stuff. So, after getting shut out of a couple of hot initial public offerings, the Colfax (N.C.) resident went online to invest in venture capital. At a Web site called OffRoad Capital, Marshall and other well-off investors put up the $25,000 minimum apiece required to buy shares in PlexusNet Broadcasting, an Internet outfit that produces online conferences and exhibitions. The deal raised $4.5 million last September for San Francisco-based PlexusNet, which has yet to earn a dime and hopes eventually to go public. ''I liked the company's concept, and I don't consider it any riskier than investing in some IPO that has a name only,'' says Marshall. OffRoad is one of a handful of Web sites that helps individuals get in on the ground floor of companies that may make it big some day. Venture capital once was the province of institutional investors; individuals could get in only if their Rolodexes were crammed with Silicon Valley contacts and they could ante up $250,000 to $2 million or more per deal. But at venture-capital Web sites, you can now participate in private stock deals for as little as $5,000 to $25,000. The only other requirement is that you be an ''accredited investor,'' the Securities & Exchange Commission term for those with at least $1 million in assets or an annual income of $200,000 over the past two years. The SEC thinks only the sophisticated should get in the door because venture capital is risky. For every 10 deals venture-capital pros invest in, only two or three may turn out to be home runs. The rest are likely to provide small returns or losses. But venture capitalists have enjoyed outsize returns during the tech boom, making others eager to get involved. Who wouldn't want to buy into the next eBay or Amazon.com at $5 a share? Over the past two years, some venture capitalists have enjoyed returns of 100% or more, vs. the average 20% returns they have earned over the past 10 years. ''BUYER'S MARKET.'' Of course, venture investing looks less appetizing in light of the recent tech stock sell-off. Venture capitalists make money when a company is bought by another or successfully goes public, and a slower IPO market means fewer opportunities to cash out. But some venture capitalists maintain that today's cooler investing climate is actually a great time for private equity deals. ''Traditionally, when the IPO window closes, entrepreneurs who planned on taking their company public turn to venture capitalists for funding,'' says Stephen Pelletier, OffRoad's founder and CEO. ''It becomes a buyer's market.'' Still, you may have to wait longer for a payoff. Chris Selland, a vice-president at the Yankee Group in Boston, says young companies will have to be more seasoned before they can go public in today's cautious market. Recently, venture capitalists have waited as little as 18 months between the time they invest in a company and its IPO. A five-year waiting period is more typical. If you want to give online venture investing a whirl, be prepared to do a lot of homework. Each venture-capital Web site demands careful exploration because the services they offer and the level of sophistication demanded from investors vary widely. Some sites, like garage.com, are geared to individuals who have industry expertise and will work with a young company's entrepreneurs to nurture the business. OffRoad, by contrast, selects companies that don't need hand-holding. But because OffRoad makes you bid on shares via auction, you must figure out what the company is worth. MATCHMAKERS. In most venture deals, investors receive convertible preferred shares that contain restrictions designed to protect their shares from dilution if the company sells more equity in the future. Once a company goes public, private equity investors must also generally wait six months before they can cash out or take their payoff in more shares. WR Hambrecht, an online investment bank and brokerage firm in San Francisco, offers the easiest investing format. You need at least $5000 to get in, depending on the deal. The price is set by Hambrecht and other institutional investors. Hambrecht collects a 2% fee up front and takes 20% of any profits if the company goes public or is acquired. Since Hambrecht began offering online private placements in October, 1999, it has completed 25 deals involving 500 individual investors. To participate in future deals, you must open a Hambrecht online trading account. You'll learn of new deals via e-mail. OffRoad's site is free to investors, although the San Francisco-based investment bank plans eventually to charge a fee of $1,000 for the first year and $250 a year afterward. Since it opened in March, 1999, OffRoad has signed up some 5,000 individuals and raised $42 million for seven companies. OffRoad recently forged an alliance with Charles Schwab. It also offers some deals jointly with Robertson Stephens, the San Francisco investment bank. Ahead of a deal, investors can view financial information on the company at the Web site, as well as ask company executives questions during a Webcast. Garage.com helped 40 companies raise $101 million in 1999, says CEO Guy Kawasaki. It acts as a matchmaker between entrepreneurs and investors, and does not offer private equity deals online. Investors congregate in ''Heaven,'' a password-protected area of the site, to review business plans. If you signal interest in a company, garage.com sends your background to the company. If the company is also interested, garage.com introduces the two parties and then bows out. The charge for investors is $495 a year. A drawback to venture investing online is that you won't get diversification unless you can afford several deals. To build a diverse portfolio, consider investing in a venture-capital fund. Such funds have traditionally been limited to high rollers, but the first publicly traded one, meVC Draper Fisher Jurvetson Fund, will make its debut on the New York Stock Exchange on June 26 (www.mevc.com). The $330 million closed-end fund plans to invest in 30 to 50 companies and will charge a 2.5% annual management fee and 20% of any profits. There is no minimum investment and the fund will be open to all. If you take the plunge into venture capital, remember the risks. Only invest money that you can afford to lose. Then sit back and dream about buying a South Seas island if your company hits it big. Best Bets OffRoad's site, free to investors, has signed up 5,000 investors and raised $42 million for seven companies since March, 1999. OffRoad recently forged an alliance with Charles Schwab and offers some deals jointly with Robertson Stephens. Before deals, investors can see financial details online and question execs in Webcasts By SUSAN SCHERREIK _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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