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Don't wait for the IPO: How to buy hot start-ups
Just because hot start-ups like Kabam, ZocDoc and Sunrun are staying private longer than did tech companies of the past, retail investors don't have to be totally shut out of the action. They just need to be more creative.
One method gaining traction is the SharesPost 100 Fund, a collection of venture-backed companies that's been available to the investing public for the past year. With as little as $2,500, investors can buy into a basket of start-ups the same way they would purchase a mutual fund of public stocks and bonds.
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Launched in March 2014 by former Silicon Valley Bank (SIVB) executive Sven Weber, the SharesPost 100 Fund currently has 19 companies, with two previous members-Flurry and Datalogix-having been acquired by Yahoo (YHOO) and Oracle (ORCL), respectively. Investors that got in on day one have seen gains of 26 percent, more than double the increase in the S&P 500 over the same stretch.
For sure, this is a tough way to try to make a quick buck. Tech start-ups are inherently risky, particularly when fewer sophisticated investors start getting involved with very limited financial data on the companies. Weber says the key is creating a diversified portfolio of mature businesses (annual revenue of $50 million to $100 million) that in earlier days would have been perfectly suited for the stock market.
"The general public is missing out on it," said Weber, who's based in Menlo Park, California. "Public investors today are only getting access to companies that are already maximized in terms of enterprise value."
To create the SharesPost 100 Fund, Weber established a fund with 25 million shares available to be sold. The starting share price was $20, and that fluctuates based on the value of the underlying assets. So when a company in the fund raises money at an increased valuation, the price goes up.
This too is fuzzy, as valuation information is often not publicly available. The real returns come at the time of an acquisition or following an initial public offering. As of Friday, each share was worth $25.20. SharesPost makes money by charging a 1.9 percent advisory fee.
There are other equally risky avenues for general investors to tap the venture market. One is GSV Capital (GSVC), a business development company that buys shares of emerging tech companies. Another is Hercules Technology Growth Capital (HTGC), a provider of venture debt. In both instances, stock investors are buying shares in the parent company as opposed to a fund.
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Because of the fund structure, there's no liquid market for the shares, and investors can only sell a portion back to the fund on a quarterly basis. Again, this is no place to store cash that may be needed to put food on the table.
In the past couple weeks, the SharesPost 100 fund has added ZocDoc, which lets consumers book doctor appointments online and from mobile devices, and Lookout, a provider of mobile security software. Weber expects to have 50 companies by the end of the year. Mobile game developer Kabam is the single biggest holding.
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The businesses Weber's fund is going after are part of a separate list called the SharesPost 100 List, a group of the top late-stage venture-backed start-ups on the Nasdaq (NDAQ) Private Market. Nasdaq and SharesPost formed the private market joint venture in 2013 as a way to help private companies conduct secondary share sales for employees and early investors .
Names that you won't find in Weber's fund include Uber, Dropbox and Airbnb. That's because those companies, already worth at least $10 billion, don't offer enough potential upside to the types of investors that Weber is seeking. He prefers companies that are likely two to three years from an initial public offering and that haven't been completely swept up in the current valuation madness.
"When you're getting in at a billion dollar valuation or more, the probability of a good outcome goes down," Weber said. "I'd rather go in a little earlier."
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