The meVC fund is breaking down venture-investing barriers. Is it a good investment?
Barriers to venture capital investing are opening slightly with the pure-play meVC Draper Fisher Jurvetson Fund 1 {NYSE:MVC}. Now, for better or worse, almost anyone can enjoy the highs and lows of the VC game once played only by institutions and the very wealthy. But, beyond the hype, is meVC a smart investment?
Launched a few months ago in partnership with Draper Fisher Jurvetson, the Redwood, City, California-based venture capital firm, the fund invests exclusively in privately held companies with cutting-edge technologies. As a closed-end fund trading on the NYSE, meVC does not redeem its shares from the public. Instead, investors buy and sell MVC as they would a stock.
Pros and Cons of Investing in meVC
So far, meVC’s short-term record is unimpressive. The fund capped its investment at $330 million at the end of March and began trading on the NYSE on June 26 at $20 a share. Since then, the shares have plummeted just over 25 percent.
“Unfortunately, we were caught in the downdraft a bit, which has been broad and indiscriminate,” says Andrew Singer, president of meVC. Notwithstanding, Singer maintains that meVC – at its low current price – is a good opportunity for long-term investors.
Thomas J. Herzfeld, a Miami-based investment advisor specializing in closed-end funds, agrees. “You can buy it at roughly 75 cents on the dollar, so we’ve begun to accumulate a position for our clients.”
The premise of meVC, however, is high expenses for future high gains. The fund not only charges a hefty 2.5 percent management fee, but investors also must also relinquish 20 percent of any realized gains in the fund to its managers.
Although not typical in the mutual fund industry, Singer defends this “giveback” as standard fare in the VC industry – and necessary to attract and retain top VCs to run the fund.
Where the Fund is Spreading the Wealth
The fund’s assets currently total $314 million. Of that, $100.5 million has been invested in 12 private companies in areas ranging from information services to enterprise software. Recent additions to the portfolio include Pagoo, a San Francisco Internet phone-service provider; EXP.com, an expert advice; web site; and FOLIOfn, a Web-based wrap program, which charges a flat annual fee to allow investors to own a basket of securities. The remaining $200 million or so will be spread among 30 to 50 companies over the next 1 ½ years, Singer notes.
What makes meVC preferable to a mutual fund that invests in venture capital is that it is a pure play managed by John Grillos, a professional venture capitalist and electrical engineer who, in addition to managing other VC funds, has served in senior management positions in high-tech companies.
The risk for the fund and its investors is that it will likely take a few years to see which of these young, unproven companies will produce gains. And then there’s the wobbly IPO market.
Does it make sense to invest in a VC-specific fund? Absolutely – if you can stand the risk. Kristoph Rollenhagen, director of closed-end fund research at Prudential Securities, who follows meVC, recommends a 1 percent to 3 percent allocation for investors looking to reap returns uncorrelated with the stock market.
And over time, that’s a good bet. According to a recent by Venture Economics, a research firm in Newark, New Jersey, the industry as a whole has outperformed the S&P 500 Index by about 8 percent over the past ten years.