Mark Bridge of The Times explains how to join the amateur fund managers who are outperforming the professionals

Fund managers might be associated with sharp suits, vintage champagne and a business school education, but an American website is using the investment strategies of amateurs, including a retired forklift driver, to run a successful mutual fund.

More than 100,000 people in 130 countries have signed up free at Marketocracy.com to manage their own $1 million (£484,411) fantasy portfolio of US equities. Every month or so, the top 100 performers are identified and their trades are monitored and used to steer the M100 fund. These “master” members are rewarded in cash, earning up to a few thousand dollars a year.

Ken Kam, who launched the simulation in 2000 and the fund a year later, says: “No one can be good at everything. What could be better than pooling so much experience?”

The fund has certainly performed. It has beaten the S&P 500 bench-mark consistently since 2002 and appreciated by 90 per cent, against the index’s 52 per cent, since inception. Mr Kam puts this down to members’ backgrounds in different areas and not only “finance”.

He takes the example of one stock to explain how the M100 is managed. “In 2005 I noticed that two of our top ten investors had bought big stakes in Elan, the Irish pharmaceuticals company. I asked them what they liked about the shares and we e-mailed the same question to the 1,500 other members who had bought them.”

A third of them responded, explaining that the shares had tumbled more than 90 per cent after the company’s product Tysabri, a multiple sclerosis (MS) drug, was withdrawn from sale in the US. About 50 members with MS were especially knowledgeable. “They wanted the treatment despite concerns about side-effects. We listened and bought the shares.”

The move paid off. Tysabri was reintroduced after pressure from MS sufferers and Elan’s share price recovered – climbing from $7 when Marketocracy purchased to a high of $23. The stock is the fund’s largest holding. “Wall Street said sell,” remembers Mr Kam. “They listened to doctors, but we had access to patients, who have a different perspective.”

Chris Rees was one of the two investors whose initial purchase of the shares caught Mr Kam’s eye. The 55-year-old British expatriate, who lives in the Dominican Republic with his wife and three-year-old daughter, is Marketocracy’s No 1 investor. His virtual portfolio has appreciated by more than 800 per cent since 2000, outperforming every US mutual fund with his average annual return of 44 per cent. “I have managed my own money for a long time,” he says. “But I am self-taught, with no degrees.”

Mr Rees has applied lessons learnt in Marketocracy to real-world investing with spectacular results. His average annual return over five years is 49 per cent. The money he has made has lifted him out of “poverty” and funded the purchase of several properties in the Dominican Republic. He says that the Marketocracy simulation is useful for anyone who wants to see how a portfolio is put together and works. “I have learnt a lot,” he says. “The best investors are not necessarily the smartest.”

Mark Taguchi, of Marketocracy, says that many members aspire to become full-time investors like Mr Rees. But he says that they should build a track record in real, as well as virtual, shares before leaving work. Mr Taguchi says: “For example, T.J. White, of Texas, worked the night shift driving his forklift for a food company so he could trade during the day. Now he makes so much, he has quit his job.”

Investors who want the experience of managing a virtual portfolio, but would prefer to trade in UK shares can get started with a virtual £100,000 account at BullBearings.co. uk. The site is free and has more than 85,000 members, many of them students. Unlike Marketocracy, the site is not linked to a fund. For now.

George Grima, of BullBearings, says: “We are looking at launching something similar in the new year. Having thousands of mini fund managers each doing their bit to generate excess returns is very exciting. The potential is enormous.”

If the company does go ahead, it may have competition. Mr Kam says that Marketocracy is looking at taking its concept overseas. Mark Dampier, of Hargreaves Lansdown, the independent financial adviser, says that the model has every chance of success. “The returns against the S&P 500 look extremely good. This is interesting and exciting and there is no reason why it could not be brought to the UK, Europe and Asia.”

Tags: Marketocracy

Vaxart Inc., a biotechnology company focused on the development of oral vaccines, said it received $3.3 million in new funding.

San Francisco-based Vaxart said the round was led by San Jose-based Quantum Technology Partners and Palo Alto-based Life Science Angels.

Other investors include Bay Partners and Sand Hill Angels, which both have offices in Menlo Park.

Vaxart also said it was awarded (under its former name of West Coast Biologicals) a National Institutes of Health SBIR grant of $600,000 for development of the company’s platform technology. Vaxart will use the new capital to support late-stage preclinical testing for its first product, a vaccine for avian flu.

– San Jose Business Journal

Tags: Vaxart

VentureBeat reported:

Vaxart receives $3.3M for oral vaccines — San Francisco’s Vaxart, a biotech developing novel adenovirus-based vaccines, raised $2.7 million in a first funding round. Vaxart also received a $600,000 small-business innovation grant from the NIH to assist in developing the company’s vaccine platform.

Vaxart’s vaccine technology involves a non-replicating adenovirus engineered to produce a particular bacterial or viral protein, or antigen, which stimulates an immune response. The vaccine, which consists of the adenovirus and an “adjuvant” designed to enhance the immune response, is packaged in a capsule that can be taken by mouth.

Vaccines that depend on viral “vectors” like adenovirus are promising because they can produce immunity without the need to rely on attenuated or killed disease virus. When injected, however, such vaccines frequently stimulate an immune reaction to the adenovirus itself, which can negate the effect of the vaccine or subsequent booster shots. Vaxart believes that oral delivery can sidestep that problem.

The company’s early candidates include vaccines against avian flu, seasonal flu, and biowarfare agents. Investors in the round included Quantum Technology Partners, Life Science Angels, Bay Partners and Sand Hill Angels.

Tags: Vaxart

FacebookWidgets.com writes:

The Lotto application, created by Dank Apps has received $250,000 in funding from Bay Partners. I previously covered AceBucks receiving an additional $200,000 in funding from the Bay Partners AppFactory fund. So what is the Lotto application? It’s pretty simple. Every day users can get a ticket to be entered into a lotter drawing. At the end of the day, cash is awarded to the participant who’s ticket is drawn. Where does this cash come from? Advertising.

Apparently enough people are clicking on ads that they can afford to give out $400 a week. This new Lotto application is going to eventually have some components that are directly integrated into the AceBucks application. As Michael Lazerow, CEO of Buddy Media previously suggested, their arrangement with Bay Partners was set up so that they could integrate AceBucks into each of the applications that received funding. It appears that this is one of those applications.

I am interested to see the response from others in regards to this announcement. So far, the majority of applications that are receiving funding are not necessarily the golden applications that I have frequently discussed. Instead, applications that attempt to distribute gold by turning their applications into marketing channels are the ones that are receiving funding. This contrasts to typical Web 2.0 sites in which the product is king. In the world of Facebook applications, creating channels for marketing before developing robust products is what’s important (at least that’s what it appears).

I have spoken with other venture capitalists that have disclosed to me investments they have made in other applications, a few of which have been more utility focused. For the most part though, investments in Facebook applications is still rare. There are nowhere near as many Facebook startups receiving funding as there are general web startups. It will be interesting to see if this trend continues. If you want to play the daily lotto on Facebook, go check out The Lotto application.

If you want to learn more about getting funding, go check out the DankApps website to learn more about the company that build the Lotto.

Tags: AceBucks, The Lotto

Increasingly disenchanted with professional advisers, investors are finding sound advice and improved returns with the help of online communities

by David Bogoslaw

Two years ago, Eric Wolff, 25, was handed the reins of a $5 million family trust after his family saw how badly it had been managed by a full-service brokerage firm. For the four months ended Oct. 31, the $1 million in accounts that he directly oversees has returned 13%, something he attributes to advice he received on Covestor.com, an online investing community, and top-notch research he’s found at other financial Web sites such as Valueinvestorsclub.com and Seekingalpha.com.

People saving for retirement are equally inspired to find the best investment advice. Increasingly, they’re less willing to trust brokers who they believe are motivated by greed and tend to put their own interests ahead of their clients, according to a 2004 study commissioned by the Securities Industry Assn.

Burned Retiree Tries His Hand

Bob Craft, 64, a retired pilot for Delta Air Lines (DAL), joined online investing community ValueForum.com in early 2004 after losing 82% of his defined pension when Delta filed for bankruptcy. At the time, his assets were invested in mutual funds. Nervous about his retirement savings, he split his portfolio three ways—between Fidelity Investments, Bank of America (BAC), and his own trading account—to compare the investment results.

Craft’s brokers told him that over the long run, he wouldn’t be able to beat their performance because they invested for a living. At the end of the first year, his account had increased 30%, while the money managed by the brokerage firms was up just under 8%. His returns far outpaced those of his brokers in the second year as well. “The highest return every year has been by me, so I just moved all my money to me,” he said, adding that he couldn’t afford his brokers’ low gains.

Craft now manages 100% of his portfolio, spending about six hours a day reading up on stocks he hears about from fellow members at ValueForum and placing orders through Fidelity’s ActiveTraderPro. Year-to-date, his portfolio is up 38.2%, he says, and he no longer worries about his retirement nest egg.

Communities’ Key Asset: Transparency

As more individual investors like Wolff and Craft take control of researching and buying stocks, options, exchange-traded funds, and mutual funds online, they’re joining a new generation of online investing communities to help them reach their goals. So instead of following recommendations from full-service brokers or advisers, for investment advice they’re turning to people who are putting their own money on the line. The online investing communities take the old forums and message boards to the next level by offering tools to verify the track records of and rank up-and-coming investing gurus.

Unlike the social networking platforms TradeKing.com and Zecco.com, these new investing sites don’t execute trades. What they’re selling is the ability to pull in and aggregate trading data from members’ existing brokerage accounts so they can track each person’s total portfolio.

Tracking capability is important because these communities aim to level the playing field, paving the way for a new type of investment adviser, one who’s more credible because you know what stocks he owns. Full-service brokerages and other incumbents are afraid of this, since nontransparency protects their profit margins, says Rikki Tahta, chief executive of New York-based Covestor.

What Investors Want

Before launching publicly in mid-September, CakeFinancial.com, a San Francisco-based online investing community, conducted several focus groups to see what online investors were really seeking. Steven Carpenter, Cake’s founder, said investors want to find peers with the same basic outlook or trading strategy, but better performance results. Cake also learned they want advocacy—the assurance that the customer’s best interests, not the adviser’s, come first—more than education.

Cake tracks stocks, ETFs, and mutual funds and plans to add options and fixed-income trades in the future. While all the trading activity that Cake imports can be measured, members don’t have to reveal their net worth, the amount they’re investing, or the number of shares they’re trading. Eliminating the sensitive information allows users to communicate freely with each other, says Carpenter.

Cake’s service is free, but once membership has grown to at least 10,000, Carpenter says he’ll create low-cost, customized asset-management services based on the aggregated performance metrics of Cake’s members. The idea is to take aggregated performance data and overlay it on a member’s portfolio to show what stocks he should sell and which ones he should hold on to. A premium service would show members the asset allocations of their top 10 model investors and notify them via e-mail whenever one of these people buys or sells a stock, or even adds a stock to his watch list.

Fund Management Insight

For Covestor, the imperatives are verification and evening out the playing field for retail investors. By giving them the same tools that a hedge fund manager has, such as the analytics that help them understand the risk they take vs. the returns they get, and how those compare with their peers, benchmarks, and professionals, Tahta hopes to “burst open the fund management world.”

Covestor is currently a free service, but plans to go to a compensation business model sometime in 2008, under which members would pay a fee to follow top performers’ portfolios, and Covestor would collect a small percentage of the fees charged by its top performers.

When ValueForum launched in late 2003, it offered a flat fee for lifetime membership to the first 200 people to sign up for the service, and within six weeks it had sold out. Through those early adopters telling friends, the community has grown to 1,400 members—most of them age 55 and older and retired with an average portfolio of $1 million, says co-founder and Chief Operating Officer Adam Menzel. Members pay an annual fee of $220 to use the site.

ValueForum doesn’t import and track members’ investment accounts, but it gives members the chance to gauge each other’s performance in other ways, such as quarterly contests where each person chooses three stocks they think will rise during that three-month period.

Growth in Self-Directed Portfolios

Another reason that investors are looking for new ways to exchange financial advice is that broker-advisers are showing less interest in handling portfolios valued under $1 million. That leaves 15 million U.S. households with assets between $100,000 and $1 million looking elsewhere for investing advice. These households’ assets total $4.5 trillion, or 35% of U.S. retail assets, most of which is being serviced by the mutual fund industry, according to a study by Forrester Research (FORR) published in March, 2006.

Institutional investors are also getting involved in online investing communities. Marketocracy.com, a San Mateo (Calif.)-based investment company that launched in July, 2000, uses a social network to generate the research that informs its funds’ investment decisions.

Marketocracy’s founders, Ken Kam and Mark Taguchi, opted for an alternative to Wall Street research based on what they learned while co-managing a top-rated technology fund at Firsthand Capital Management in the late 1990s. Kam, who had previously worked in the medical devices industry and was running the fund’s health-care/medical portion, found that the best ideas about a company and its business prospects came from people working in that particular industry, not from Wall Street analysts and brokers.

“It’s a process of asking the right questions of the right people,” says Kam. “People on Wall Street aren’t the right people because they rarely have the experience to ask the right questions.”

Kam and Taguchi believe it takes at least five years of tracking a person’s trading decisions to be able to discern their skill level. But after a year and a half, they felt confident enough in the collective wisdom of a select group to pick the top 100 out of about 40,000 members to serve as model portfolio managers for the mutual fund they set up. Six years later, the Marketocracy Masters 100 Fund (MOFQX) has roughly $45 million under management and, since inception, has returned 92.42%, compared with a 53.37% return by the Standard & Poor’s 500-stock index, including dividends, over the same period.

Wisdom of Crowds vs. the Individual

One bone of contention among the next-generation investing communities is whether the financial rewards of following a single individual match those of tapping into the collective wisdom of the crowd. Cake believes in taking what seem to be the best practices among groups of like-minded investors and showing members how they compare to others who are doing better than they are, both as individuals and in the aggregate, says Carpenter. It’s not a herd mentality that Cake enables members to tap into, but the collective wisdom of the few who resemble them and consistently outperform the markets over time, Carpenter says.

To identify such model investors, Cake has a feature that gathers up to 10 years of back data from the trading accounts members have opened at 11 of the top brokerage firms. Data extending over that long a time span are more convincing than the three months’ worth of back data that most other sites import, Carpenter says.

For Covestor’s Tahta, it’s the idiosyncratic thinking of individuals with insights into particular sectors that’s paramount. He cites one member, a doctor in Wisconsin, who has a unique understanding of relative strengths and weaknesses among medical equipment makers. Given all the factors that inform investment decisions, such as goals and risk tolerance, he believes it’s a waste to limit this information to a single investor’s account when it could help others with the same basic approach.

Marketocracy believes it’s beneficial to be able to access the group’s aggregate wisdom and that of individuals at different times for different reasons. Their model portfolio managers, a rotating group of the top 100 performers, tend to know the right questions to ask, based on their trading experience in certain sectors. But they often turn out not to be the people with the right answers, says Kam.

“Through our forums, increasingly what we’re finding is that you want to let everybody post [comments], because the person who has the answer might have a poor portfolio overall but may have the key piece of information that will make a great investor have conviction in the stock idea,” he says.

High-Quality Discussion

It’s likely that even without the functional bells and whistles, online communities would attract investors based solely on the quality of the discussions—a welcome refuge from the junk many say is clogging the message boards on financial portals at Yahoo.com (YHOO) and AOL.com (TWX). ValueForum even allows members to vote to dispatch off-topic posts to a separate discussion board called the “Coffee Shop” so that the main discussion threads stay focused on investing matters.

Online investing communities have also begun to extend their reach beyond the virtual into the physical world. Take InvestFest, an annual conference organized for and by ValueForum members. Now in its third year, the conference offers presentations not only by members who specialize in certain investing topics, but also by industry professionals such as investment newsletter editors and occasionally a company chief financial officer. Cake is also envisioning local investor cocktail parties around the country in the future.

Many people tout the Internet, and message boards in particular, as tools that are democratizing the flow of information. But for Kam and Taguchi, research by social network is more about meritocracy than democracy. It’s about weighting people’s voices by their track records and giving commensurate attention to the most talented. Says Kam: “Other social networking sites looking to make a play in investing are interesting and share the same goals as us, but it’s going to be years before they have anything substantial to prove to investors that they can add value.”

Bogoslaw is a reporter for BusinessWeek’s Investing channel.

– BusinessWeek

Tags: Cake

By Alexander Haislip of Venture Capital Journal.

Faced with departures and poor returns, Bay Partners brought in new blood and came up with a whole new game plan. Now, will it work?

Two years ago, Bay Partners was a zombified venture firm staggering around Silicon Valley trying desperately to look alive.

The Bay Partners bleed started in 2005 after firm co-founder John Freidenrich retired and General Partner Loring Knoblauch resigned. Then General Partners Chris Noble and Bob Williams transitioned to part-time roles—at least that was the official word at the time. The move required Bay Partners to renegotiate with limited partners and left the firm severely understaffed. Noble and Williams’ profiles were subsequently pulled from the Bay Partners site. Dino Vendetti jumped ship a few months later to join Formative Ventures.

Neither the current Bay partners nor the former investors we talked to would discuss what caused the departures. A catalyst may have been the poor performance of the firm’s $365 million 10th fund, raised in 2001. That fund has lost more than $4.5 million of the $17 million it invested on behalf of the California Public Employees’ Retirement System, according to a public document. That works out to an annualized rate of return of negative 10 percent. The fund focused on enterprise software, semiconductors and communications infrastructure. So far, the firm has only exited two of the 29 companies the fund backed, according to Thomson Financial (Publisher of VCJ).

Managing General Partner Neal Dempsey, a Bay Partners’ veteran since 1989, could have turned off the lights and gone home. He decided to reboot the firm instead.

Step 1: Bring in Outsiders

Dempsey made Atul Kapadia, who had joined the firm in 2004, a managing general partner. Then he put Kapadia in charge of re-staffing the firm. Meanwhile, Dempsey went hand to hand with the former partners, lawyers and limited partners. He promised the firm would be staffed while Kapadia reached out to his network to hire. “Neal did a fantastic job of shielding us,” Kapadia says. “I had a great opportunity to exercise my leadership because he was insulating me from the other problems.”

Bay added Neil Sadaranganey, a former Stanford classmate of Kapadia, and Eric Chin, who worked with Kapadia in 1999. Then Kapadia reached out to Sandesh Patnam , whom he had known since 2001, to take the roll of CFO, and added Salil Deshpande, with whom he had shared an office at Sun Microsystems.

“I rebuilt this firm from the ground up, brick by brick,” Kapadia says. “I wanted to bring in guys who had as little venture capital experience as possible and had a very confrontational style. That was exactly what we were looking for. I said: ‘Let’s reinvent the wheel because it hasn’t been reinvented for 30 years.’”

Step 2: Add Caffeine

Bay didn’t reinvent the wheel, but it did grease it. The firm’s new general partners were all former entrepreneurs and executives—doers. The firm needed a way to get things done, move quickly through opportunities and make snap decisions.

“I rebuilt this firm from the ground up, brick by brick. I wanted to bring in guys who had had as little venture capital experience as possible and had a very confrontational style.”

It had looked at 145 business plans during 2005 and inked seven new investments. That’s slow even for a firm with serious personnel problems. But since Kapadia and Dempsey caffeinated the culture at Bay, things have picked up. It has looked at 910 plans during the last 12 months and made five new major investments.

Part of the change meant putting everything out on the table and looking at it objectively. The partners didn’t need to finger point or kvetch. “The limiteds were concerned because change is never easy in venture capital firms,” says Kapadia. “What resonated with them was the sheer hunger of the team and the very simple operating principles. They felt a new sense of relief that we were not afraid to talk through our losses and our warts.”

The firm also changed the way it looked at opportunities. It started backing earlier stage companies. It dug into Internet deals and started writing smaller checks. The reasoning was simple: The value of new Internet startups lay in customer traction, not intellectual property. You could afford to throw money at startups with crazy ideas just to see if users would bite. “Series A can often be no-man’s-land,” says Deshpande. “It’s wasted money if the site isn’t going to get traction. That’s why we started the seed program.”

Step 3: Create a Game Plan

Bay was racing ahead by 2007 but still had a lot of ground to make up. The firm had taken a bashing in the press the previous year, as various outlets (including sister publication PE Week) carried stories about the departing partners. “Media likes hyperbole,” Deshpande says. “Things are often not as bad or dark as they seem. When you see a star exploding, you’re really looking back into the past. By the time everybody else started talking about [the departing partners], it had already happened and we had moved on.”

The opportunity to hit the nitrous came in May, when Facebook opened its code and allowed developers to build applications. Senior Associate Angela Strange thought it might be interesting to create a program to target Facebook applications. The team dove into the code, pulled it apart and kicked it around. The verdict: Facebook had built a viable platform. The partners let Strange run with the idea. She teamed up with Deshpande to start AppFactory. The mandate, as Deshpande puts it, was to “take it to the next level and make our deals even more micro, even smaller than our typical seeds.”

Step 4: Spread the News

Bay hired public relations firm Porter Novelli to blast the business press with releases about the firm’s new program in July. Pundits weighed in on both sides of the program. Some thought it a genius move poised to take advantage of the burgeoning social medium. Others opined that the firm would be sorry when Facebook stole developers’ ideas and crushed the nascent startups. Either way, people were talking about Bay Partners again. That resulted in even more business plans coming through the door.

The firm looked prescient when Facebook itself copied the AppFactory idea in September, announcing a $10 million fund focused on application developers. Facebook partnered with Accel Partners and The Founders Fund to launch FBfund. Deshpande says the program validates Bay’s AppFactory.

But the real validation came in October, when Salesforce.com approached Bay about starting a similar program for developers building apps around its platform. It turned out that the software-as-a-service (SaaS) giant maintains an internal list of the 50 or so strategic companies that are developing on its platform. “We came to know that six of them were our investments,” Deshpande says. “They saw the success of our AppFactory announcement and saw some of the deals we were doing and it just made sense for both sides.”

“Positive change is sometimes easier when there’s already lots of change going on.”

Bay partnered with Salesforce to commit $15 million over three years to early stage startups using the company’s Force.com application platform to develop services. Each initial investment will range between $500,000 and $2 million. Bessemer Venture Partners also joined the investment keiretsu with a $10 million commitment. Salesforce is providing advisory services to the venture firms.

Bay has been working with startups looking to build applications based on Salesforce for at least two years. It has seven startups in the SaaS space and they’re doing well, Deshpande says. Eloqua, a Toronto-based maker of automation software, is booking revenue in the tens of millions, and recently closed a $23 million round of venture financing at a significant increase in valuation, he notes.

Bay isn’t done with platform plays just yet. Deshpande says to expect another platform-oriented investment program soon, but he declines to specify the sector.

Step 5: Plan for the Future

With deals rolling in and a refurbished reputation, the management at Bay is now looking down the road. Dempsey is still actively investing, albeit at a slower pace. Kapadia is managing day to day operations.

The firm has all but jettisoned under-performing investment sectors such as communications infrastructure equipment in favor of Internet deals and emerging cleantech opportunities. Its platform plays—Facebook for consumer applications and Salesforce for business apps—are driving deal flow.

With an eye toward the future, Bay is looking for investment associates and another syndication partner for its Facebook AppFactory program, Deshpande says. He would not specify what company or firm might be tapped.

For now, Bay has managed to turn a meltdown into an opportunity for evolution. “Positive change is sometimes easier when there’s already lots of change going on,” Deshpande says.

Still, there’s no guarantee that the application platform strategy will be successful. The firm has committed less than a tenth of its fund to the Facebook and Salesfoce initiatives. It will be very difficult for that little amount of money to move the dial. Worse, it may suck up too much of the partners’ time and attention.

Bay will face competition from several camps. Companies such as Slide and RockYou have built their entire business around creating and marketing Facebook applications such as slide shows. Not to mention Facebook’s own investment program. In Salesforce applications, Bay will have to contend with Emergence Capital Partners, which specializes in SaaS investments and has just started investing out of a $200 million second fund. Emergence has a close relationship with Salesforce, since it was a seed investor in the company.

It may be years before the restructured Bay Partners sees returns from its new directions. The firm will have to execute on its core investment thesis and get the early stage investments of its predecessors out the door if it expects to successfully raise another fund.

Tags: AppFactory