The absolute
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The absolute
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In past years, investors have been frustrated because they could not get a slice of the pie when a company goes public. Institutions pick up the lion's portion of the shares, leaving individuals to buy only after prices have gone sky high. One way around this is to simply buy a portion of the company before it starts the IPO process.
Many venture capital funds were launched during the Internet boom in the 1990s. They did not all disappear in the 2000 Internet financial debacle, though some fared much better than others. As of 2004, in addition to the term "venture capital fund" (VC) you need to add the term "business development company" (BDC).
Buying stock in a non-public company is called a "private placement". Generally, to safeguard the public, SEC regulations require (and for good reason) that only an "accredited investor" may participate in a private placement. Investing in a company at the pre-IPO stage is very risky. Venture capital funds, however, are often open to a wider range of investors.
To lessen the risk (slightly), attract more investors, and help small companies to grow, venture capital funds enable you to buy pieces of several small companies at once. These are not mutual funds, nor are they at anywhere as safe as mutual funds. Some are probably safer than others. Buyer beware! They are structured in various ways but generally involve buying shares in limited partnerships. When the companies go public, the limited partnerships are converted into stock. Generally, after a fund is fully subscribed, the administrating company will launch another fund, and some of the larger companies have a large menu of funds they offer. Read a good article about the difference between private placements and VC funds which was at Direct Stock Market. Since DSM has reorganized, here is a text version of the article in which the graphics and links may no longer work.
Another term you may see is "SBIC". This stands for Small Business Investment Corporation. SBICs supply equity capital, long-term loans, and management assistance to qualifying small businesses. They are privately owned and operated, and use their own capital as well as funds borrowed from the US Small Business Administration. While they are profit-seeking enterprises, SBICs select small businesses to be financed within the rules and regulations set by the SBA - therefore, only firms defined by the SBA as "small businesses" are eligible for SBIC financing.
Strictly speaking, an incubator helps a small company to grow by offering business services and advice. A venture capital fund helps the company raise capital. The line is blurred since many VC's offer incubator services and many incubators offer VC services. A VC and an incubator may team up to offer services. Then, too, a "holding company" may be offering both types of services. To complicate matters, there are many levels of growth services and of venture capital financing. For example, "incubator" often refers to just the very initial level of services, when a start-up company doesn't even own a phone and a fax machine. Especially since the year 2000 dot-com crash a firm may prefer to call itself an "accelerator" rather than an incubator. "Mezzanine Financing" refers to venture capital raised after a company is already a working entity but before it is public. You will also see the term "Internet Zaibatsu" used to try to describe the new type of Internet venture holding company. A traditional zaibatsu is a Japanese family of companies such as Mitsubishi or Mitsui. Yet another Japanese term you may see is "keiretsu". A keiretsu is a looser alliance of companies than is a zaibatsu.
Although the term "Business Development Company" (BDC) seems to have arisen in the years following 2000 as a general term to fill the gap in the investment vocabulary, strictly speaking it should apply only to companies which are in compliance with "The Investment Company Act of 1940. Section 54 -- Election to Be Regulated as Business Development Company". What is the difference between a venture capital fund and a business development company? Not much, in terms of risk. A BDC is a private-equity firm which goes public and sells shares in itself. Some people see the BDC as a fast alternative to the usual, time-consuming method of raising private-equity capital. Since anyone and everyone can invest in a BDC listed on the NYSE, AMEX, NASDAQ or OTCBB, some of the experts quoted in this article were horrified at the idea of BDCs attracting the general public. Akin Gump took a more optimistic view in the article Private Equity Goes Public. If their site reorganizes and the article disappears, here is a text-only version in which the links probably no longer work.
There are so many combinations and variations of levels and services that you have to study each company separately. Read a good article which describes different types of incubators from The Chicago Tribune . Since the newspaper has reorganized and the link quit working, here is a text version of the article in which the graphics and links may no longer work.
As mentioned above, some of these companies are, themselves, publicly traded. Does this mean if you invest in a holding company's stock you are investing in the funds? Maybe -- maybe not. It depends on how the company is structured. To complicate matters, in some cases only part of a company is a venture capital branch, while the rest is a more traditional firm.
Interestingly, some of these companies have evolved from very different roots. Well-known examples of these are CGMI and iGATE Capital (formerly Mastech). More recently J-Net (formerly Jackpot Enterprises) decided to completely change its focus.
One of the first companies to call itself by the new term "BDC" is Apollo Investment Corp (AINV), a New York closed-end-fund hybrid that provides financing to priveately held companies.
A number of large, established, financial firms have created a department to launch venture capital funds. Among these are Andersen Consulting, E-Trade, Oracle, Dell, Novell, and Microsoft.
In addition, many small firms have launched a variety of incubators and funds. As an article in the March 10, 2000 Wired News said,
It doesn't take a lot to declare oneself an Internet incubator. "The barriers to entry for calling yourself an incubator are basically nothing, so someone can just wake up one day and say: I'm an incubator," said Sky Dayton, who happens to have co-founded one himself, 6-month-old eCompanies. At the most basic level, someone could just empty out her garage, install a high-speed Internet connection, and start luring in the startups, Dayton said.
If you are a business owner searching the web for the words "venture capital" or "private placement" you will find many such firms seemingly begging to give you money. (Since the 2000 dot-com crashes, however, they want to see a sound business plan and reasonable expectations of profits.)
However, if you are an investor wishing to participate in a venture capital fund you will have less luck. Most VC firms are organizations of wealthy individuals or firms who are not looking for more partners. Discouragingly for the small, non-accredited investor, many of the long-standing companies such as Kleiner Perkins Caufield & Byers and the new, interesting companies such as Accel Partners, Technology Crossover Ventures and Garage.com are totally inaccessible. Therefore, the venture capital firms listed on our chart will be those looking for, and accessible to, small investors, though at the bottom of the page we also list suggestions to help entrepreneurs find capital.
As an investor, how do you recognize a good venture capitalist? In a June 2000 article "Venture Capital Scorecard", at the online edition, The Standard noted that "The VCs best able to grow their firms coffers are often not the best from the public investor's standpoint.". This very good article has disappeared from the magazine's site, therefore, here is a text-only version in which the links probably no longer work.
Although there is no index which specifically tracks this new category of company, we have started a Stock Price Chart which may someday turn into such an index.
Here we have a comprehensive table of companies who have funds in which the general public may be able to invest.
As mentioned before, generally, to safeguard the public, SEC regulations require that only an "accredited investor" may participate in a private placement. Since the investments in the table below are more open, does that mean the SEC considers them safe? Do SEC regulations safeguard the public for all types of investments? Not by a long shot! Although the new types of VC investments give the public more options, they also require the individual to be much more careful and thorough in investigating any potential investment.
At most of the private placement sites you must be an accredited investor to take advantage of their offers. The SEC defines an accredited investor as a person with over a $1 million in assets or whose income is at least $200,000 ($300,000 jointly with a spouse).
Although the Year 2001 will go down in history as a bad one for venture capital, it saw the launch of the New York Private Placement Exchange , an electronic communications network that hopes to obtain exchange status from the SEC. The exchange's purpose is to create a secondary market for venture capital that is the equivalent of the public stock exchanges.
Be sure to visit ACE-Net (Angel Capital Electronic Network) developed by the SBA, listed under the "Private Placements" link, above. You can also find many firms via the other matchmaking services on that page.
Also, try the two Internet.com online publications, Internet VC Linx and Internet VC Watch, mentioned above. Read the news and follow the links to the VC search. Here you will find not only a directory of funds but a directory of VC-funded companies. If you find a company similar to yours, this may give you an idea of who would be interested in you.