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April 30, 2000

Historic Fund Venture

By Stephen Lacey

Draper, Fisher Jurvetson, a venture capital firm, has embarked on a mission that could have far-reaching consequences - a $330 million closed end fund for retail investors.

The Redwood City, Calif.-based outfit's meVC Draper Fisher Jurvetson Fund I was priced at $20 a share on March 28. Lead manager Prudential Securities, placed 16.5 million shares of common stock.

The fund is expected to commence trading on the New York Stock Exchange next month, under symbol MVC.

While other venture capitalists are skirting regulations that prohibit them from floating initial public offerings, Draper, Fisher took a different route.

Instead of eyeing traditional institutional limited partners for capital, Draper Fisher has instead petitioned the public to participate.

"This is the first time a venture capital firm has gone out into the broader market to raise capital," said John Taylor, director of research at the National Venture Capital Association.

New Asset Class

To be sure, the implications of how individuals manage their retirement accounts could be significant if private equity joins stocks and bonds as a new asset class.

"meVC is an interesting step," said Josh Lerner, professor of business administration at the Harvard Business School. "It address a fundamental issue posed by a change in our retirement system."

"We're moving from a world where our retirement funds are in large corporate pension plans to a world where funds are managed in individual 401K plans," Lerner added.

Other members of the syndicate include regional banks Raymond James & Associates Inc. and Gruntal & Co., as well as online brokers DLJdirect Inc. and Fidelity Capital Markets.

Back To The Future

The concept of a closed-end VC fund fell off the modern-day radar screen. Financial historians trace the structure back to the roots of venture capital in the 1940s and 1950s. Faced with restrictions that prevented pension funds from investing in the new asset class, then Harvard Business School professor Georges Doriot turned to wealthy individuals to finance the American Research and Development Fund in 1946, Lerner noted.

By returning to a closed-end structure, Draper Jurvetson was able to circumvent a requirement in the Investment Company Act of 1940 that an investment firm "control" at least 60 percent of its investments to retain its public status.

Incubators such as CMGI Inc. (Nasdaq:CMGI), SafeGuard Scientifics Inc. (NYSE:SFE), Internet Capital Group Inc. (Nasdaq:ICGE), and idealab! have petitioned the SEC to lower the threshold to a 25 percent target, sources said.

The inability of stockholders to redeem shares is another advantage of a closed-end fund structure. Unlike open ended funds, the only barometer that can fluctuate is the fund's stock price. At open ended funds, managers sell part of the portfolio to raise cash, often during distressed market conditions. Shares of the fund trade like any other NYSE common stock.

Traditional Investments

meVC Fund manager John M. Grillos said he is making traditional venture capital investments with the proceeds of the floatation. Most of meVC's deals likely will emanate from the Draper Fisher's network of seven affiliated venture capital firms. While specific investments haven't been identified at press time, the fund is targeting late-stage investments - second, third or mezzanine rounds - in information technology companies. These are primarily providers of Internet, e-commerce, telecommunications, networking, software and information services.

With Draper Fisher having successfully floated the fund, other venture capital firms will undoubtedly follow its lead. "It would be hard to imagine others not following suit," a venture capital pro said.

Stephen Lacey is editor of The IPO Reporter, a sister publication of Traders Magazine.