Tech mutual funds turning to venture capital

Several fund managers looking to stand out among the many tech funds that have launched in recent years have started venture funds.

"We've seen tech fund after tech fund launch since the Internet bubble in 1999, so these managers are wondering how to stand out in the crowd and offer people something they can't get somewhere else," said Christopher Traulsen, a senior analyst with mutual fund research firm Morningstar.

The Van Wagoner Private Opportunities Fund, launched last week and expected to grow to $150 million in assets, joins the ranks of roughly a half dozen venture funds run by traditional mutual fund managers.

The Seligman New Technologies Fund was launched in 1999, and more recent funds include MeVC's MeVC Draper Fisher Jurvetson I Fund, Munder Capital's Munder@Vantage Fund, and a joint venture with Scudder Kemper and Thomas Weisel Partners--Scudder Weisel Capital funds.

Fund companies such as these are also looking to capture higher management fees and profits, Traulsen said. Van Wagoner, for example, will charge an annual management fee of roughly 2 percent for his venture fund. That's on the high side of the 1 percent to 2 percent fee mutual fund portfolio managers change on average, Traulsen said.

And while Van Wagoner is adopting a standard practice of venture firms of receiving 25 percent of the net investment profits from his new fund, such a practice is unheard of among mutual funds.

The length of time investors have to commit to the fund also runs counter to mutual funds, through which shareholders can pop in and out of funds. In Van Wagnor's venture fund, for example, the fund will not grant any redemptions until 2003.

Investors will also find themselves adhering to requirements similar to traditional venture investors. Individuals are required to have at least $1 million in net worth. And for participants in the Van Wagoner Private Opportunities Fund, the minimum investment is $250,000--quite a jump from $1,000 or $2,000 that's often set for mutual funds.

Wealthy investors could just as easily participate in a traditional venture fund. But portfolio managers believe they bring more to the table by their experience in taking stakes in newly public companies, Traulsen said.

But Traulsen noted, "I don't necessarily believe it's true."

Van Wagoner Private Opportunities plans to invest in pre-IPO companies and continue with the investment as they cross over into the public markets, according to filings with the Securities and Exchange Commission. And the fund may make further investments in the companies after they've had their market debut. The fund will eventually have 40 percent of its investments in publicly traded companies, according to its SEC filings.

By placing bets on various pre-IPO companies, portfolio managers may also be hoping to grab a "halo effect" for their other mutual funds, Traulsen said.

"If they have success at picking out some pretty good pre-IPO companies, they might be viewed as picking up on trends before they happen. And that would help increase interest in their mutual funds," he noted.