Venture Capital Trusts - The possibility of huge gains
As a gambler (risk-taker), I find Venture Capital Trusts and Angel Investing very tempting. The possibility of huge gains riding on the back of a new service or technology inspires the pioneer spirit within me.
For the uninitiated, Venture Capital is required by many start-up companies in order to proceed with the manufacturing of a patented technology or to bring a new service to the market. These start-ups are usually immature in their equity base and therefore they approach investors willing to take a portion of the business (and therefore its future earnings) for an agreed value - the amount of venture capital.
Without VC many startups can never progress to the next stage and their ideas never come to fruition. Banks and financial institutions aren't prepared to take the risk of loaning investment money and these businesses aren't big enough to float on the stock exchange.
Therefore, their dependence on a venture capitalist or angel investor is exceptionally high and deals in the investors favour aren't hard to procure.
However, while the possiblity for huge gains exists so too does the risk of losing your capital or being stuck with a company that will never perform as well as you expected. So, before you head into the investment heavenlies and become some startups angel you may want to consider whether this type of investment is for you.
The Daily Reckoning(UK Edition) have put together a list of 10 questions to consider before you venture off into the VC unknown.
1. Decide if this type of investing is for you
Do you get excited about new businesses and/or technologies?
Do you already invest in similar high risk investments such as AIM and PLUS Markets stocks and/or Venture Capital Trusts?
2. How much can you afford to invest?
Have you got at least £25,000 per year cash to invest?
Can you afford to lose the entire amount without feeling the pinch?
3. Make time to find and understand the best opportunities
Are your daytimes free to attend investor events?
Do you have time to look through the legal documents before you invest and perhaps perform your own "due diligence"?
Can you spare the time to monitor your portfolio after you have invested?
4. Use your own expertise to spot great investments
Do you have particular expertise in an industry?
Can you rely on your gut instinct to tell you if something is going to be a blockbuster?
5. Don’t get the wool pulled over your eyes
Are you readily accepting of a plausible explanation?
Can you spot a great entrepreneur amongst the also-rans?
6. Find the right advisors to help you with
your investments
Are your current advisors competent to advise you on your investments?
Do your social and business networks include people who could help with good deals and/or expertise?
7. Set your own level of involvement
Do you want to be active – and actually sit on the board or become involved in the management of your portfolio companies – or do you want to be passive – or something in-between?
Do you want to be a sector or stage specialist?
Do you want "prepared" deals or do you want to get your hands dirty?
Do you want to operate alone or in a club or syndicate?
8. How secret do you want your investment activities to be?
Would you be happy to have calls from friends of friends asking for investment money?
How would you feel if your friends asked you to invest in their business?
9. Set your time horizon
Are you trying to build a portfolio of say 25 investments or just two or three?
10. Do your research – and have patience
The best investors learn about this asset class before handing over a penny.
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