Invest Like a Venture Capitalist

What, then, can be used to gauge a company's potential from the perspective of a venture capitalist?

Ben Choi can tell you. Choi is a senior associate and Kauffman Fellow at Storm Ventures. Choi says, "At a high level, I look for passionate and committed entrepreneurs who are building a technology-based product that has the potential to deliver significant value to the market."

According to Choi, "great management, strong technology and big market" are important factors in his search for investment worthy companies. "There are many investment opportunities, so I focus my time on companies who are building businesses around real technology that will enable them to grow rapidly," Choi says.

Now if you think that all this VC talk could never apply to your own portfolio, think again.

Your Own VC-Style Portfolio

While there are public investments to be had in general private equity, such as Blackstone (BX Quote) and now KKR (see "KKR Files for IPO"), as well as (to some extent) venture capital with MVC (MVC Quote) and Harris & Harris (TINY Quote) (for example), you might find some nice rewards in structuring your current portfolio like a venture capital fund. Here are three things to consider when you're picking venture-capital-style stocks for your own portfolio:

1. Get comfortable with high risk. If high risk isn't your cup of tea, VC-style investing might not be a good strategy for you. Venture capitalists look for companies with higher risks than someone who is squeamish about losses or fast-approaching retirement should undertake.

2. Look beyond the numbers. Numbers are a big part of investing (see quantitative analysis ), but they're not everything. Bernardez explains that "somewhat qualitative milestones, such as market validation, product development progress, team recruitment and business model validation" are valuable ways that venture capitalists look at start-ups with no financial track record; they're also a way for you to weigh non-financial data when making investment decisions about public companies.

3. Ride the VC wave. For venture capitalists, the real payday can come when a company they've invested in privately goes public via an initial public offering (IPO ). These IPOs can also lead to a big payout for you -- if you choose wisely. According to Choi, "Ultimately, you want another company or the public markets [IPO] to put a value on the growth of a portfolio company." With 26 VC-backed IPOs in the second quarter of 2007 alone (according to a report by the National Venture Capital Association), it shouldn't be too hard to find a stock that will help you get in touch with your inner venture capitalist.