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My late mother’s single foray into the world of venture capitalism happened in 1957 when she invested $1,500 in a ski area before it had any lifts or trails. It was just an idea of a young 20-something guy who snow camped and tested snow conditions for two winters at what became Killington, a ski area in Vermont which is now the largest in New England. To offer some perspective, $1,500 was about half of what a Ford Country Squire station wagon sold for at the time.

So here is how the system worked: Mom was in the “first round” which included some wealthy people from Connecticut but also included local people like Mom, a part-time registered nurse, who actually skied — local color, so to speak. Since the ski industry has historically been littered with the “carnage” of abandoned properties and serial bankruptcies, this was definitely a long-shot. Mom’s investment included a free season ticket to perpetuity, which meant that I could inherit it and even pass it on to one of my great grandchildren. Mom sold it every year for 30 years to the same person for $300 — which amounted to an annual dividend. More about Mom in a minute, but first the basics:

To understand how Mom made out like a bandit years later, we need to review how venture capital and the “marked-to-market” concept come into play. First, all shares in a company are valued based on the sale price of the most recent sale of shares. A startup begins with perhaps two people who invest $150,000 from friends and family and start a business. Getting some traction, they are able to talk a venture capital company into investing $2 million in return for 20 percent of the company. The founders still own 80 percent, so if 20 percent sells for $2 million, the whole company is worth $10 million, right? The founders’ $150,000 initial investment is therefore now worth $8 million — “on paper.”

A few years later, the company is really rolling (actual trails and ski lifts in Mom’s case) and the next round of private equity buys 10 percent of the thriving $8 million company for $10 million. This propels the company’s total value to $100 million. The founders now own just 70 percent, but that means their $150,000 has now grown to a value of $70 million. The earlier investors who bought 20 percent for $2 million still own 20 percent of a company worth $100 million. Their $2 million has now grown to $20 million.

By the way, new money invested in the company is purchasing newly issued shares of stock. It is not buying the shares already owned by existing stock holders. This is a way for the company to access additional money which, unlike a bank loan, never requires interest payments and never needs to be paid back.

Eventually, the company does a public offering and sells 20 percent of the company, which raises $50 million in exchange for 20 percent. This makes the whole company worth $250 million. The founders still own 50 percent after successive dilutions, but hey, 50 percent of $250 million is better than 100 percent of nothing.

Something similar happens in Silicon Valley in about one out of 10 startup situations. The occasional winners more than compensate for all the losers.

Luckily for Mom, she was one of the winners and sold her stock after 40 years, when Killington sold to the American Ski Corporation, which was a public company. American Ski reneged on the season ticket deal and invited the remaining 20 to 30 now octogenarians to sue the company if they didn’t like it. Mom, of course, thought about it and tried to rally her Vermont troops, but was content in the end to walk away with her $150,000 in cash, in exchange for the stock — a profit about 100 times her original investment.

Mom’s ski career began as a child in Vermont in the 1920s, when her Finnish parents made skis for their seven kids by steaming the tips of boards to turn up the front tips and then fashioning some bindings out of leather straps and jar rubbers. The novelty of making some money in the ski industry was poetic justice in a sense for a woman who never quit the sport until her early 80s. On February 13, she would have been 98 years old.

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