MicroEquity = Micro Venture Capital? (Real Estate as Synthetic Liquidity for Small Business Equity)

last friday, continued meeting with Reuters Digital Vision program folks at Stanford about microfinance, microequity topics.  we came up with basic outline for an interesting way to do "microventure" investing via a series of ~$1M investments in a local general partner, who in turn would invest in a combination of synergistic businesses and property / infrastructure assets.  assuming the filter/selection process for the GP is done well (which is a *big* assumption), this would allow for a more scalable method for microfinance investing.

in contrast to traditional venture capital, the goal for these investments would be:
  - smaller mature size of business, but lower risk / higher rate of success
    (ie, 8 of 10 generate positive cashflow, rather than 1 out of 10 going public/getting acquired)
  - lower growth rate target,  but achievable profit targets
  - use property & infrastructure assets to set a floor for investment return, also to provide pseudo-liquidity
  - pick businesses that work together as a group, sort of like a mini-keiretsu
  - pick businesses that improve the overall value of the property assets
    (significant increase in value of land should be a primary goal)
  - cashflow return sometime after years 1-3; mature / steady-state cashflow around years 5-10

however, there are several similarities to the venture capital model:
  - general partner responsible for investing in businesses directly
  - general partner draws salary from % of assets under mgmt (~2-5%?  tbd)
  - general partner has a stake in both raising funds (10%) and eventual profit (20% of upside)

Steven's notes here:
  http://www.rdvp.org/~sketchpel/blog/2004/10/rdvp-finance-sig-10282004.html

more on this as it evolves...

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UPDATE: in hindsight, i believe the key innovation we may have come up with here is using real estate investment as a synthetic exit / form of liquidity for small business equity.  by combining 1) small business equity investments with 2) real estate investments in cheap property, the subsequent economic activity should increase the value of the land, and if sold at a later point could provide a modest form of liquidity.  note that a requirement would then be that for the country of interest, national property rights should be well-established & ideally local mortgage markets should exist to facilitate capital.

Comments

[Fred]

Sounds like a great website. Could you post your link if you do this website?

[Larry Wong]

Do you see Micro Equity of rapid growth factories in China?

I am thinking of setting up web site, listing start up factories in China economic zones areas, with portions of the factory equity. Investors will have option to convert loans into equity stake of the factories.