What HNW Clients Should Know Before Making Venture Capital Investments



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June 9, 2014

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What HNW Clients Should Know Before Making Venture Capital InvestmentsBy Donna Mitchell, Financial PlanningMarch 19, 2012The economy is on the verge of another wave of venture capital investment, according to a report fromseveral private equity investment executives who attended the recent annual conference for high-net-worthinvestors.Investors who are intently interested in those opportunities should pay particular attention to time horizonsand investment styles, despite the lure of big returns, according to the executives, who were speaking athigh-net-worth learning group TIGER 21’s annual conference.”Risk is fun,” said Timothy Draper, founder and managing director of Draper Fisher Jurvetson, a venturecapital firm based in Menlo Park, Calif., in a statement released after the meeting. “You take risk for fun.”Big returns do not always follow big risk taking, however, Draper said. He was among several speakers,including Dennis Atkinson, managing partner of ePlanet Capital, and Josh Wolfe, co-founder and managingpartner of Lux Capital Management.So financial planners need to keep several lessons in mind as they help clients navigate these investmentoptions.For starters, a client’s time horizon is critical, because private equity and venture capital investmentsoften require patrons to stay invested for seven to 10 years, according to Cal Simmons, the Washington,D.C., chapter chair of TIGER 21. “If a client is 40 years old and has a liquidity event, then 10 years isfine,” Simmons told Financial Planning in an interview following the annual conference. “You look at the appropriate investment by age group as well as by net worth.”Planners also have to assess their clients’ investment styles a little differently from the way they wouldlook at investment styles for traditional stocks and bonds. Draper’s firm, for example, has a track record ofinvesting very early with top companies that had breakthrough ideas, like Hotmail.Those firms also found fresher ways to carry out functions that had bureaucratic agencies in a rut. Examples include Google, whichsuccessfully challenged libraries on searches, as well as FedEx and Hotmail, companies that exploitedweaknesses in the U.S. Postal Service.But if swinging for the fences does not suit a financial planning client’s investment style, the planner shouldconsider funds that hit lots of singles and doubles.”They tend to say things like: ‚ÄòI’d rather have a successful manager with an OK idea, than a bad managerwith a good idea,'” Simmons said.Another lesson: look abroad. America does not have a monopoly on entrepreneurs, and investors shouldconsider looking overseas for opportunities. Skype, the popular internet video calling service, for instance,was co-founded by Niklas Zennstrom, a Swede, Draper said. That is why Draper’s firm has set up officesand outposts in 18 countries.