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Online VC funds for individuals

Venture capital firm Technology Funding is offering shares of its venture fund to individual investors online.

It just might be the next online trading phenomenon.

First there was E*Trade (EGRP), followed quickly by a slew of other online brokers trying to appeal to the growing mass of investors that have tapped the Internet to execute trades.

Now venture capital firm Technology Funding is offering shares of its venture fund to individual investors online. This may spur a host of other venture funds on the Internet, all looking to open their doors to this group of active investors.

Venture capital funds historically have been open to only institutional investors, university endowments, and occasionally high-net-worth individuals. Investor money is pooled together into a fund, and the managers of that fund then invest the proceeds in various start-up companies.

Industry watchers note that a few venture funds exist to serve small investors, but, to date, Techonology Funding is the only one online.

More could be just around the corner.

"I would expect more to pop up, but we won't know how well they'll do for a number of years," said Kirk Walden, a national director at Price Waterhouse, which tracks venture capital firms. "The barrier to entry is essentially zero. If I have a Web page, I have a business. All you need is a telephone. The Internet is an efficient way to reach a lot of people."

Jody Sherman, vice president of Technology Funding, a firm that has offered VC funds to individuals through broker/dealers since 1979, said individual investors should be able to invest in the same things that smart money managers do.

Sherman said that the only difference between the firm's previous funds and its current one is that it is being offered over the Internet. This cuts down on printing costs and cuts out the fees to broker/dealers.

But investing in a venture capital fund may not be for everyone, say traditional venture capitalists and industry watchdogs.

Venture capital investing has far greater risks than trading in stocks, bonds, and mutual funds, said Neil Weintraut, a partner at 21st Century Venture Partners, a San Francisco-based firm that invests in start-ups pursuing opportunities on the Internet.

"When a company goes public, it already has a market place and management, but classic venture investing is two guys in a garage. It is a lot of glamour, and just because you can invest in one, doesn't mean you should," Weintraut said. "You have to be prepared to lose the total amount of your investment."

In addition to greater risk, venture funds also are illiquid investments, Weintraut said, explaining that investors will not have access to their investment for a number of years, if at all. Investors get their payout only if the companies go public or are sold.

Individual investors, vs. institutional investors or educational endowments that have more of a financial cushion, may come into a bind if they need that money sooner rather than later. Venture funds may tie up an investor's money for 10 years.

The appeal of high return is part of the attraction to venture investing, however, there is a tendency to only see the successes that produce big bucks for the backing firm. It is speculated that Draper Fisher Jurvetson made a 60-percent to 80-percent return on its investment in Hotmail when Microsoft (MSFT) acquired it last week. However Weintraut said that while there are respectable returns, jackpot returns don't happen all of the time.

He explained that three out of 13 investments may return $60 million each, but the remaining 10 investments may just float along or go under. So to get a full understanding of how well the VC firm has done, one must average the successes along with the failures.

"We are investing in companies that are new, and some of those will fail and some won't fail," Technology Funding's Sherman said. Investors may lose their capital--it says so in our advertising and in our prospectus--but that is the biggest risk in any investment. We mitigate that risk by investing in things we are familiar with."

Sherman agreed that this kind of investing isn't for everyone. Technology Funding wants educated investors that understand the risk of investing and the illiquidity of the investment, he said.

"We don't want uneducated investors," Shermand said. "They will be a service nightmare, and there are costs associated with that."

Investors must invest a minimum of $1,000 to get started in the online VC fund, and must meet certain financial requirements. The individual must have a net worth of at least $45,000, excluding the value of a home or car, and make at least $45,000 a year. The firm also suggests that the investment in the fund should not exceed 10 percent of the individual's net worth.

Ken Michal, assistant editor of Computerized Investing, said that, as with any investment, knowledge is a must. But for investing online, he said, investors must be aware of how secure a Web site is before providing personal financial information.

"You need to know how secure the site is and how secure the server is. That is the main thing that you need to be aware of when trading on the Internet," he said.

Michal added that investing in start-ups through a VC fund makes it harder to be an educated investor because start-ups have no history and no past performance. Therefore, you need to rely on the performance of the individuals in charge of the fund.

"You need to understand who you are dealing with," he said, "regardless of where you are dealing."