Ask anyone in the IPO market -- there's nothing better than getting in on the ground floor of a newly public company. Unless, of course, it's getting in under the ground floor.

That's what venture capital is all about -- bankrolling start-ups and emerging companies that are short on funding but big on promise, with IPO day coming closer to the end of the relationship than the beginning.

It's extreme investing -- in the same way that partnering with your B-school buddy in a Silicon Valley garage to bring a new-economy concept to market isn't exactly taking a corporate job.

And that's why venture capital has generally been a private club, limited to investors who can both tolerate risk and focus long term -- namely pension funds, endowments, foundations and filthy rich individuals.

That is, until lately.

Now, a couple of pioneering closed-end funds are paving the way to what middle-class investors hope will be venture capital riches. But can the funds deliver the market-beating returns investors expect? And, more important, can investors wait as long as a decade to find out?

It's easy to see why ordinary investors might find venture capital appealing. Last year was particularly lucrative, as IPO investors paid handsomely for shares of venture-backed start-ups. But long-term returns are also compelling. The table below compares returns for the periods ended Sept. 30, 1999.

Source: Venture Economics

Little wonder individuals sank as much money into venture capital as private endowments and pension funds did last year, according to

Venture Economics

, the venture capital research arm of

Thomson Financial Securities Data

.

But those were rich folks -- sophisticated investors that meet

Securities and Exchange Commission

guidelines for investing in private equity because their net worth is at least $1 million or their annual income exceeds $200,000. Minimum investments might be anywhere from $50,000 to a cool $1 million.

By this summer, however, individuals will be able to invest alongside the venture capital hotshots without having to be wealthy or commit a fortune. Pending SEC approval, shares in the

MeVC Draper Fisher Jurvetson

fund are expected to be available for a minimum investment of $5,000. To qualify, investors need only $50,000 in income and $50,000 net worth -- or $150,000 net worth, regardless of income.

The closed-end fund plans to trade on the

New York Stock Exchange

. Its shares could trade at steeper discounts to net asset value than other closed-ends, though, because of the illiquid nature of its portfolio. And due to the high-risk nature of venture investing, investors won't be allowed to invest more than 10% of their net worth.

And there will be some sticker shock. The fund will charge a 2.5% annual management fee and pay meVC, the fund's advisor, 20% of any profits on investments -- the usual take for a venture capital fund. MeVC is an investment management firm formed last year. It's backed by

Draper Fisher Jurvetson

, an old-line venture capital firm based in San Francisco.

Collectively, the Draper team has more than 50 years of experience, having raised more than $800 million in more than 10 venture capital funds. Success stories include

Hotmail

, sold to

Microsoft

(MSFT) - Get Report

for $400 million, and

Kana Communications

(KANA)

another email service provider that has seen its stock rise nearly 1700% since going public last September. MeVC folks are no slouches either. They include alumni of

Robertson Stephens

,

GT Global

and

Charles Schwab

(SCH)

.

The new fund will stick to what it knows best -- Internet, e-commerce, telecommunications, networking, software and information services. It plans to raise $500 million, and hopes to turn up at least 50 promising companies to spend it on.

But the fund's prospectus warns that with money sloshing into venture capital funds, competition for the most promising candidates is fierce, and marginal prospects are becoming harder to avoid. A Draper Fisher executive I spoke with, however, says the firm reviews 20,000 business plans a year, and invests in only about 11. There have to be some worthwhile leftovers from that pile.

Another VC Opportunity

While the MeVC/Draper Fisher Jurvetson fund gets all the press, another venture capital fund has been hovering in cyberspace since December 1997, quietly wooing small investors. The

VC-6

fund is run by

Technology Funding

, a Silicon Valley firm with a 20-year track record that has raised more than $315 million, ranking it within the top 15% of U.S. venture capital funds.

The fund has invested in four companies, including one,

Women.com Networks

(WOMN) - Get Report

that has gone public. The others are

Biex

, provider of women's health care products and services;

Sanarus Medical

, maker of surgical devices for treating tumors in women, and

WorldRes

, an Internet-based hotel reservation network.

The VC-6 fund's terms are similar to those of the meVC/Draper fund, although the minimum investment, net worth and management fees are all slightly lower than those expected for the meVC fund. Investment in VC-6 is conducted entirely over the Internet. The prospectus and financial reports are only available online, and investors must charge share purchases on a credit card.

Unlike meVC, the fund's shares won't trade, and it will be closed to new investors after it raises $100 million. Why is it taking so long to raise the cash in a red-hot market? Blame it on the ad guys.

"We ran thousands of banner (Internet) ads and didn't have much to show for it," says spokeswoman Julie Anne Overton. After much market research, VC-6 has decided direct mail is the key. Check your box because 100,000 pieces went out last week.

Alternate Paths to VC Land

There are more traditional avenues to Venture Capital Land for the net-worth challenged. The

(VWPVX)

Van Wagoner Post Venture fund, managed by small stock guru Garrett Van Wagoner, holds 28 private companies among its 200-plus stock holdings, accounting for just under 4% of assets. The fund's pre-IPO picks have included

Ariba

(ARBA)

,

Phone.com

(PHCM)

,

Interwoven

(IWOV)

and

iVillage

(IVIL)

. Van Wagoner says he makes two to four times his investment in private companies by the time they come public. The fund has returned an average 60% a year since its 1996 inception.

Investors who prefer the IPO route to pre-IPO companies soon will be able to bid for shares in

Garage.com

, an online matchmaker for venture capitalists and entrepreneurs. In the great tradition of

CMGI

(CMGI)

and

Internet Capital Group

(ICGE)

, Garage.com plans to raise $68 million in an IPO led by

Goldman Sachs

(GS) - Get Report

.

I think it's great that the democratization that has swept Wall Street is moving West to the private equity markets of Silicon Valley -- as long as investors primed by the IPO frenzy don't embrace venture capital too casually. IPOs are about one-day pops and short-term sizzle. Venture capital is about waiting four to eight years -- or longer -- for that one jackpot that may never materialize.

A venture-capital stake may be well-suited for retirement savings, as long as the worker in question isn't a gray-haired already. It's OK for a college fund, as long as the student is still majoring in recess. Asset allocation? Financial planners recommend that private equity not exceed 5% of assets, even for high-net-worth investors. For the rest of us, best to consider it mad money.

Anne Kates Smith is a senior editor at U.S. News & World Report in Washington. At time of publication, Smith had no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds.