Gerken, The Little Book of Venture Capital Investing

Despite its “miniature” size, Louis C. Gerken’s The Little Book of Venture Capital Investing: Empowering Economic Growth and Investment Portfolios (Wiley, 2014) covers a lot of ground.

Gerken opens with a brief but scathing critique of the Occupy Wall Street movement, arguing that “if it wasn’t for capitalism,” and venture capitalists in particular, “none of the resources they had relied on to fuel their righteous indignation would even exist.” (p. xiii) In fact, as he contends later, “Venture capital investment has been almost singlehandedly responsible for delivering huge productivity gains to the U.S. economy by way of financing new information, communication technologies, and innovations.” (p. 52)

The text proper is divided into nine chapters encompassing a historical overview of venture capitalism, the VC industry today, the value proposition, the prevailing investment climate, VC investment options (both listed and nonlisted), and the investment process (sourcing and screening, due diligence and selection, and portfolio construction, monitoring, and monetizing).

Gerken is writing for the investor who wants exposure to venture capital. It is not enough, of course, for the individual investor to know the investment options that are (and some that may become) widely available. Whether he wants to invest in a publicly traded fund or to get involved at the grassroots (via crowdfunding, for instance), he has to understand how venture capital works.

For starters, venture funding is no guarantee of success. In fact, a study showed that “of 2,000 companies that received venture funding between 2004 and 2010, about 75 percent of them failed to have a successful exit.” (p. 193) (That’s even worse than restaurants do, at least according to a research study of Columbus, Ohio restaurants published in the Cornell Hotel and Restaurant Administration Quarterly in 2005. Admittedly, I’m comparing apples and oranges here since—among other things—a successful exit often means an acquisition, but during the first year of operation slightly over one-quarter of all restaurants closed or changed ownership; by the end of their third year, just short of 60% of all restaurants closed or changed ownership.)

Gerken offers the reader a host of web resources. These tools, coupled with the valuable information he provides in his own analysis, are excellent ways to research the viability of becoming a venture capital investor.