Personal Finances and the Potential in Direct Investing (Ron Goforth Commentary)

At the risk of coming across as a one-trick pony, or perhaps as someone who is only interested in promoting direct investment in technology and knowledge-based companies, I would like to offer a few more observations and comments on exactly that. r

It has become rather clear that there is no dearth of money in venture capital fund coffers: eighty-four billion was an estimate published last week. But remember that VCs do not generally target or accept early-stage companies for investment. There is then an opportunity for such investments with the promise that in later stages of company maturity, venture money will be there to continue their march towards profitability. r

Early-stage money alone is not sufficient, and it needs to be complemented with a level of funding adequate to support commercialization – otherwise the routes to realizing good returns are going to be limited (early sale of intellectual property or rights to use new technology, for example). r

A much more comprehensive and thoughtful analysis of early-stage investing than space allows here is presented in “Why Seed? Why Now? An Investor’s Perspective: The Case for Seed Stage Investing Today,” by Henry Wong of Artemis Ventures.r

Mr. Wong makes an observation that I would like to quote here: “Our belief is founded over 20 years of venture capital returns data showing seed stage consistently outperforming every asset class, including balanced portfolio, later stage, venture, buyout, mezzanine, and all private equity.” I recommend a careful reading of the original article which can be obtained by inquiring to [email protected]

The arguments for early-stage investments, with their potential for high returns, are rooted in sound investment decision-making, and intuitional investing will remain excessively risky. Full due diligence, which should include technology due diligence, will remain a vital part of a genuinely sound decision-making process. r

Before making an investment in technology or knowledge-based companies, the critical question “Will it work?” must be addressed. Having independent due diligence done to answer this question is probably not appropriate for the individual investor at the comfortable $25,000 level, but would work very well for angel networks where the aggregated investment is of such a size as to justify the cost of professional due diligence. r

Due diligence represents a necessary investment cost. However, done right, there would be no broker-analysts’ fees, no fund managers’ fees, and no cut otherwise taken off the top when making such investments. r

Finally, there is emerging firm offering an investment guarantee program that will cap potential losses without limiting the upside potential. The success of this program will obviously depend on excellent due diligence (underwriting in insurance terms). Beta-Rubicon has been contracted to provide due diligence and related services for the firm on a nation-wide basis. Our independent due diligence services will continue to be available to individual VCs, angels and angel networks, and other investing entities. r

Recently I wrote in another commentary that said what Northwest Arkansas needs now is reasoned and substantive investments of patient money to support technology-centric, knowledge-based enterprise development.r

I went on to urge potential investors to “Study the matter, then act.” This time let me expand on that by adding that I hope “qualified” investors will diligently analyze the potential rewards of investing in early-stage technology or knowledge-based companies, either individually or in groups akin to the angel networks we see in other areas, and then act accordingly.r

We could all win. r

(Ron Goforth, Ph.D., is the president of Beta-Rubicon, Inc., a Fayetteville firm that specializes in independent technology assessment and due diligence services for private-sector enterprises and public agencies. Beta-Rubicon may be contacted at www.beta-rubicon.com.)