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Venture Capital Investing Comments

Kelly Summers   |   March 24, 2008
I met a friend of mine the other day who invited me over for dinner. We spoke about various interesting things, but the center of our hot discussion became the subject of investing. When I asked him what type of securities he invests in, he answered, �Of course it�s stocks. Furthermore, I mostly invest in penny stocks as I like risk!� Are stocks really the riskiest securities? In fact, it�s far from being true! Consider, for example, venture capital investing.

Venture capitalinvesting means investing assets largely in companies that are developing new ideas, products, or processes. These companies are not traded on the stock market yet. The mechanism of venture capital investing can be explained as follows. On one hand, there is a company that has a fresh innovative idea but doesn�t have enough capital for its realization. On the other hand, there is a wealthy investor (known as an �angel investor�) or venture fund which can finance this innovative project by purchasing its shares to sell them later. By the time the company is put up for sale, the company�s value increases significantly, bringing venture funds and angel investors quite a good profit. Such companies as Microsoft, Intel, Google and others became giants due to financial support from venture funds.

The origins of venture capital can be traced back to the medieval Islamic mudaraba partnership. General Georges Doriot is considered to be the father of the modern venture capital industry. In 1946, Doriot co-founded with Ralph Flanders, Karl Compton and others American Research and Development Corporation (AR&DC;), the biggest success of which was Digital Equipment Corporation. When Digital Equipment went public in 1968, it provided AR&DC; with 101% annualized Return on Investment. AR&DC;�s $70,000 investment in Digital Corporation in 1957 grew in value to $355 million. One of the first steps toward a professionally-managed venture capital industry was the passage of the Small Business Investment Act of 1958. It officially allowed the U.S. Small Business Administration (SBA) to license private �Small Business Investment Companies� (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States.

Venture capital investing became extremely popular during the dot-com boom. In the late 1990s, when technological innovations conquered the world and the Wall Street was flourishing with a number of large IPOs, venture capital investing was well spread. However, the bubble cracked, and the majority of funds came to the verge of bankruptcy. Venture capital investing was almost forgotten, but in 2003 venture funds expanded again, offering new opportunities for their investors and serious perspectives for new businesses.

According to the U.S. and European analysts, venture capital investing is one of the most profitable and stable businesses. If being an angel investor is beyond your purse, you can support young companies by investing in venture funds.

Davis New York Venture Fund, for example, invests its assets into new businesses both in the USA and abroad. Besides, fund managers cut the risks by investing in large companies with market capitalizations of at least $10 billion.

There is also a cheaper opportunity of venture capital investing. Firsthand E-commerce Fund normally invests at least 80% of assets in equity securities of companies that provide products, services, and technologies that facilitate the growth of electronic commerce. The management intends to focus on companies that provide products and services that support the growth of electronic commerce. Nowadays, e-commerce is quite a profitable business. The price of Firsthands� stock is just $3.7 per share. Everyone can afford it.

Venture capital investing can be remarkably profitable, assuming all the risks, of course. Don't invest all your money in one pot. Diversification is always a smart move.
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