Getting a piece of my action

Fred Wilson · November 21, 2008 · Short URL:

You need to be a qualified investor to invest in the 'sorts of deals we invest in'

 In the past week, I've had two different discussions with readers of this blog who wanted in on one of our deals. One reader wanted to invest in Twitter, the other in Boxee. I told them both it wasn't possible. There are all sorts of reasons why it's not possible, but let's start with the qualified investor rule. To invest in the sorts of deals we invest in, you need to be a "qualified investor" in the eyes of the SEC.

It makes total sense that readers of this blog would want to invest in some of our portfolio companies. We've invested in many of our portfolio companies after we became hooked on their products. I am a fan first, an investor second. Not so many people understand our investments when we make them. Certainly not many "qualified investors" do. But the readers of this blog do. That's because you are often users well before I am.

This is a problem. We have a cash crunch emerging. We have the public markets offering quality companies like Google, Apple, and Amazon at less than 10x current cash flow. I realize future cash flow might be less than current cash flow, but still we have public markets investors who don't want to buy any kind of equities.

I suspect high quality debt that trades at 60% of face value is more enticing right now.

And yet, there are new technologies and business models and services that are emerging that will be the next Googles, Apples, and Amazons and there is no way to invest in them. Our friend Stuart Ellman at RRE Ventures wrote a great post about this last month in which he said:

RRE has a number of companies that had zero revenues when we invested and which are now doing $100 million or more in revenues and growing very quickly.  These companies have achieved what they needed to achieve, become market leaders, yet they cannot go public or exit under the assumptions that employees or founders assumed when they began.

The only way for the small investor to get a piece of the companies we are investing in is for them to go public, but that's not going to happen any time soon, maybe never again. That's how bearish I am about the public markets right now.

I've written extensively that we need a secondary market for privately held shares of venture backed companies that want or need to stay private. This is already happening with Facebook shares and it's going to happen with the shares of other privately held companies going forward. The public markets have failed to solve this problem so it's going to get solved in some other way.

We also really ought to find a way for small investors who know what they are doing to place a small bet on a company they really like. And companies like Boxee and Twitter could really benefit from that too.

This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen.

I am pining for a new regulatory regime. One that values small over big, individual decision making over institutional decision making, and innovation and the future over protecting the past. And a test for that new regulatory regime is whether the people who are participating in the creation of a new technology and industry can actually profit from it without having to do what I do.

(For more from Fred, visit his blog)

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