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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
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

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  2. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  3. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  4. Entrepreneurship

    Top 5 Most Successful Swedish Entrepreneurs

    Understand what makes Sweden a great place for entrepreneurship. Learn about five successful Swedish entrepreneurs who are making big impacts.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Entrepreneurship

    Top 5 Most Successful Mexican Entrepreneurs

    Understand why so many socially conscious entrepreneurs have come out of Mexico. Learn about the top most successful Mexican entrepreneurs.
  8. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  9. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  10. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!