3 Reasons To Venture Into GSV Capital

By Will Ashworth | April 04, 2012 AAA
Do you know the name Michael Moe? That's OK if you don't. Moe is one of the country's leading growth investors. In 2006, while CEO of ThinkEquity Partners, Moe wrote a book entitled "Finding The Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow." Many of the principles in that book are now a part of his new venture, GSV Capital Corp. (Nasdaq:GSV), which makes venture capital bets on private companies like Facebook and Twitter. By no means is an investment in GSV Capital without risk. However, for those willing to take a walk on the wild side, the future of this business development company looks promising. Here's why.

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Business Development Company
GSV Capital raised $46.5 million in its April 2011 initial public offering and another $29.6 million in September 2011. It has chosen to be treated as a regulated investment company (RIC) and as such, pays no corporate-level federal income taxes on any income distributed as dividends to shareholders.

To remain an RIC, it must distribute at least 90% of its "investment company taxable income," which is net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses. In layman's terms, 90% of its gains after fees must be distributed to shareholders. Anyone who invests in real estate investment trusts will be familiar with the taxation of RICs. The benefit for investors is it allows you to invest in private companies while maintaining liquidity through a publicly traded stock.

SEE: The Stages In Venture Capital Investing

Investment Portfolio
As mentioned in the opening paragraph, Moe's investment philosophy focuses on what he refers to as the 4Ps: People, Product, Potential and Predictability. While there's nothing earth shattering or new about these requirements; success comes from actually following them. When GSV Capital set up shop in April 2011, it intended to use the proceeds of its IPO to invest in approximately 15 companies at between $1 million and $5 million each.

At the end of December 2011, it had invested in 21 companies for a total of $64.1 million. Among the group of 21, it's invested in both Zynga (Nasdaq:ZNGA) and Groupon (Nasdaq:GRPN). Although most of its investments are common equity, it does hold a $4 million unsecured promissory note issued by PJB Fund LLC that pays 10% annually through August 15, 2012, plus an equity kicker based on the performance of Zynga stock. As of April 2, 2012, Zynga's stock is 29% above its IPO price of $10. As for Groupon, it currently trades down 24% from its $20 IPO price in November 2011. With Groupon management under fire for lax internal controls, I suspect GSV Capital will cut their losses (approximately $1 million) when its lock-up expires May 1. Thankfully, this appears to be one of the few blemishes on its dance card.

SEE: Investing In IPO ETFs

Facebook
Without a doubt its highest profile investment, GSV Capital has 350,000 shares in the social media dynamo, which it paid an average $29.90 a share for. Interestingly, it has a $2.3 million investment in SharesPost, an online secondary financial marketplace that puts Facebook's current value per share at $45. Representing 14.6% of GSV Capital's net asset value, it will get interesting once the social media site goes public in May 2012. At that point, the 181-day lock-up starts ticking down, and like all IPOs, the price could go up and then crash; or it could go up and stay up. As we stand today, it's sitting on an unrealized profit of 50%. If Facebook does the latter, shareholders will be looking at a bigger payday.

The same situation exists for Twitter. GSV Capital paid an average of $16.73 a share for $12.3 million of the common shares, and SharePosts currently pegs them at $18.50. However, some value Twitter's shares in the secondary market as high as $22, which means it could do equally as well with its biggest investment to date, depending on what happens during the six-month lock-up.

The Bottom Line
If you want to invest in private technology companies through publicly traded vehicles, GSV Capital is really your only choice. There are Business Development Companies (BDC) like Hercules Technology Growth Capital (Nasdaq:HTGC) and Horizon Technology Finance (Nasdaq:HRZN), but they are debt investors taking limited equity positions. A BDC like GVC Capital wouldn't have been possible prior to the creation of secondary markets. Now it's out leading the way.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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