said he wouldn't join any club that would have him as a member. Investors might want to remember that advice today.
Monday morning, the
meVC Draper Fisher Jurvetson Fund I
closed-end fund focusing strictly on private or pre-IPO technology companies, began trading on the
New York Stock Exchange
. Yes, the fund grants you access to the risky and lucrative venture-capital club, but there are probably good reasons to stick to your usual mutual-fund haunts for the time being.
Here's how the fund, which raised $330 million in April, is supposed to work: Portfolio manager John Grillos, a
veteran, will work closely with venture-capital shop
Draper Fisher Jurvetson
to buy stakes in promising Draper and non-Draper deals.
If you like the idea of bringing venture-capital investing to the unwashed masses,
, a fledgling San Francisco money manager, plans to launch a fleet of similar VC funds.
Some industry watchers are wary. "This is not the kind of fund the average person should consider," says mutual fund consultant Burt Greenwald. "I would be very wary of it."
The fund's proprietors disagree. "Our investors are Joe Main Street," says Andy Singer, meVC's chief executive. The firm has filed paperwork with the
Securities and Exchange Commission
for a health care-focused VC fund, the
meVC Delta Life Sciences Fund I
The new fund's closed-end structure and business development company registration give it the leeway to focus on private companies, but regulators haven't approved Draper's role yet. The upshot: For now, the fund can only invest in non-Draper deals.
Usually such an arrangement -- a fund investing in an affiliate's deals -- wouldn't be allowed because of a conflict of interest: namely, the fear that Draper might urge Grillos to invest the fund in sagging Draper deals. So the fund has asked the SEC to let the fund co-invest with Draper in companies and invest in companies where Draper already has a stake. Singer expects to get permission to co-invest in three months and won't comment when regulators might approve follow-on investments on Draper deals.
Singer is "highly confident" that regulators will approve co-investment with Draper since they've given permission to others in the past, but he doesn't know of any precedent to allow follow-on investments. He and his colleagues have taken steps to avoid any conflicts of interest, such as replacing Tim Draper with Grillos to manage the fund and requiring three independent directors of the fund to approve Draper-affiliated investments.
But until regulators respond, Draper's connection with the fund may be in name alone. The fund has already invested in nearly 10 private tech companies, none of which are affiliated with Draper. Although the fund was never intended to focus strictly on companies where Draper has a stake and the fund's prospectus discloses that regulators might not approve the overlap, the fund's name implies that investors would get some access to Draper picks.
Aside from this regulatory wrinkle, there are other key differences from regular
open-end funds you should consider before piling in.
Unlike mutual funds, which sell at their net asset value, closed-end funds typically trade at a discount to their net asset value. At the close of trading, the fund's shares, originally offered at $20, closed at $19.25.
And setting that price is a real challenge, since the securities in its portfolio aren't priced each day like public securities. The fund's pricing committee plans to price its holdings on a weekly basis, valuing private deals at cost and adjusting for positive and negative events. If a company goes public, the committee discounts the shares' value by 20% until insiders pass the lockup period during which they can't sell their stake. After that the stock is valued at its market price.
"Clearly venture capital is a risky area to get into and the pricing situation adds another layer to that risk," says Gregg Wolper, a
closed-end fund analyst.
In addition to the added risk, VC funds have a more incentive-based fee structure than standard funds, which can add up. In addition to a 2.5% annual fee, the fund also pays meVC 20% of its annual profit.
So, it's hardly your father's fund.
If you are considering it, you might want to take your time. The fund plans to put its cash to work gradually. It won't be fully invested for two years, according to meVC's Web site.
To meVC's credit, the fund's risks, quirks and costs are fully laid out in its filings and Web site. Another high-octane closed-end fund,
LCM Internet Growth
has bought shares, but for most investors, a wait-and-see approach is probably a good idea.
"You're almost always better off waiting awhile," says Morningstar's Wolper. This will give you an idea of a fund's discount, potential volatility and whether or not regulators will approve its Draper affiliation, he says.
Waiting may also give intrigued investors more funds to choose from.
"I've heard there are more funds coming into this area," says Wolper.