Democratizing Venture Capital
By Pat Dorsey
On the face of it, MeVC.com (NYSE: MVC - news) sounds like a heck of a deal.
The publicly traded closed-end fund, which debuted on the New York Stock Exchange Monday, invests solely in private companies, theoretically giving small investors a chance to make the big bucks just like Silicon Valley's venture capitalists. It's managed by Draper Fisher Jurvetson, one of the very best venture-capital firms in the business.
Because MeVC trades on an exchange, the shares are liquid and you can invest as little or as much as you like, so you're not faced with the barriers to entry and exit that typically come with venture-capital investing. Because it's a pure venture-capital fund, you theoretically get all the bang that the asset class promises. (Other well-known ``incubator'' stocks like Internet Capital Group (Nasdaq: ICGE - news), CMGI (Nasdaq: CMGI - news) and Safeguard Scientifics (NYSE: SFE - news) have either operating assets or own stakes in public companies.)
The bad news is that 99.999% of investors need MeVC shares like they need a hole in their heads. The risks of a venture-capital-only vehicle should be apparent, but in case you've been stuck in a Tibetan monastery for the past year, let's check out what happened to CMGI and Internet Capital when the IPO market soured a couple of months ago. Despite their differences, these two stocks are the closest analogues to MeVC, and each traded at about $150 per share in early March. CMGI shares now go for about $45, and ICGE sells for $34. Ugh.
Need further convincing? Here's a quote from Tim Draper himself, the founding partner of Draper Fisher Jurvetson, about investing in MeVC, from a recent interview on CNNfn: ``I want you to look at the money as gone, and then if you get any distributions in the future, think of it as your birthday.'' Gee, Tim, where can I sign up?
The Cost of Membership and the Cost of Cash
Let's talk about fees. Big ones. MeVC plans to charge an annual management fee of 2.5% of assets plus 20% of all profits. While this is par for the course in venture-capital investing, it's very hefty for a closed-end fund. Moreover, MeVC will be distributing gains every year--just like a regular closed-end fund--so investors had better be ready for some big tax bills if and when MeVC's investments pay off.
Moreover, it's almost certain that MeVC's returns will initially be a lot lower than a traditional venture-capital fund. Venture-capital funds typically stay reasonably fully invested and tap their investors for new funds when necessary to avoid the drag of carrying a lot of cash. MeVC, on the other hand, plans to take about two years to fully invest the $330 million it raised earlier this year. Although this makes plenty of sense from a strategic perspective--because it takes time to find good deals--it will significantly lower the fund's returns for the next couple of years.
So, unless you absolutely, positively gotta have a portion of your portfolio in pure venture capital--and it's beyond me why you would--MeVC looks like a big-time pass to me. High fees, lower initial returns, and high risk do not make a winning combination.
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