Many of today's biggest businesses would not be here if it wasn't for early-stage investors, who saw the long-term potential and provided much-needed startup capital. These venture capitalists help move ideas from the garage to the boardroom. In doing so, these early investors take on higher risks, but they also have the potential to achieve above-average returns for their efforts. For example, social media company LinkedIn's (Nasdaq:LNKD) early backers, Bessemer Venture Partners and Sequoia Capital, provided funding at around $11.47 a share. Today, LinkedIn's share price sits in the $80s.
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However, for retail investors, this fast-paced world of startup investing seems like an impossible egg to crack. Requiring multi-million-dollar minimum investments and huge time requirements, venture capital investing for the average joe isn't a commonplace portfolio option. Nonetheless, for investors willing to do some digging, there are a few ways to add a slice of VC to a portfolio.
The Future Today
According to industry group, The National Venture Capital Association (NVCA), in 2010 there were 462 active U.S. venture capital firms managing around $176.7 billion in committed capital. Overall, these venture capitalists invested approximately $22 billion into nearly 2,749 startup and early-stage companies. The majority of this funding has gone toward high-technology companies in fields such as software, biotechnology, medical devices, media and networking. Cleantech and green energy sources, such as solar and wind, have also experienced massive growth in VC funding in recent years.
By raising most of their cash from institutional investors - such as pension funds, endowments and high net worth individuals - venture capital funds generally don't permit retail investors to participate. To that end, in 1980 Congress created Business Development Companies (BDC) that allow smaller, non-accredited investors to invest in startup companies. Typically, BDCs will lend capital to small and mid-sized firms at high rates. More recently, many BDC firms have begun to take larger equity stakes in these companies as well as obtaining board seats and providing guidance to these young firms. It is in this relatively unknown sector that investors can access a swath of VC for their own portfolios.
A Venture Capital Portfolio
The NVCA estimates that 40% of venture-backed companies fail outright, 40% produce moderate returns and only 20% produce extremely high returns. So spreading one's bets across the sector is prudent. For those investors looking for a broad approach, funds like the PowerShares Listed Private Equity (NYSE:PSP) and UBS E-TRACS Wells Fargo BDC ETN (NYSE:BDCS) track a variety of VC, BDC and private-equity firms. However, there are a few direct ways to participate in the high-growth areas of VC funding. Here are a few picks:
A vast range of applications - across medicine, electronics, biomaterials and energy production - could be created using new techniques in nanotechnology. On the forefront of this shift is Harris & Harris Group (Nasdaq:TINY). Providing capital for equity stakes, the company has been pretty successful. Recent home runs include synthetic biofuel producer Solazyme (Nasdaq:SZYM); Innovalight, which was aquired by DuPont (NYSE:DD); and BioVex, which was purchased by Amgen (Nasdaq:AMGN). TINY is currently trading near its 52-week low, and now could be good time to strike on the firm.
Finding Success Across Many Technology Sectors
Hercules Technology Growth Capital (Nasdaq:HTGC) has provided more than $2.4 billion in capital to more than 170 companies. Aside from the stable returns from its loans, Hercules has had 37 exit events including seven IPOs. This includes IPOs of Ancestry.com (Nasdaq:ACOM) and Amylin Pharmaceuticals (Nasdaq:AMLN). Investors are rewarded with a generous 10% dividend yield. Similarly, focusing on the high-technology sector, TICC Capital (Nasdaq:TICC) offers investors an 11.2% yield and recently obtained credit on attractive terms to expand its investments.
The Bottom Line
For many regular retail investors, the high net worth requirements and time constraints make adding venture capital to a portfolio impossible. However, by doing some digging, there are some ways for the average joe to become his/her own VC fund. The previous three business development companies are great examples of firms that are on the cusp of high technology and growth. (For related reading, also see Cashing In On The Venture Capital Cycle.)
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