Investing in startup companies is a risky way to make money.

And if the startups are carmakers, it may be even riskier yet--as the Illinois Student Assistance Commission found out recently.

The state agency managing the College Illinois prepaid tuition program had invested $10 million in the stock of range-extended electric car maker Fisker Automotive. It now expects to lose about two-thirds of that amount.

As Fisker raises additional funds, ISAC was offered the opportunity to invest more money to keep its stake at the same percentage, a privilege afforded to early investors as later rounds of capital are raised.

But more conservative investing rules enacted since that original 2010 investment do not allow the commission to take new stakes in individual companies.

So ISAC's share of the total company will fall--and, in what is apparently a "down round," so will the value of that share.

With roughly $1 billion already invested, if just $100 million of new capital causes existing stakes to fall by two thirds, that would seem to indicate that the company's overall value has fallen.

The fund said its $10 million investment in Fisker in late 2010, now worth a nominal $14 million, was expected to lose roughly two-thirds of its value when Fisker completed a new round of fundraising.

Green Car Reports reached out to Fisker for details on the valuation of its latest financing, but at the time this article was published, had not received a response.

On Friday, Fisker Automotive said it had closed its latest round of $100 million to fund development of its Fisker Atlantic mid-size car.

That indicates that the revaluation of ISAC's original stake will now take effect. The commission disclosed the news at a September 14 meeting, according to Crain's Chicago Business, which wrote about the investment loss the week after.

"It wouldn't be a surprise to see something in the neighborhood of a two-thirds reduction in value," wrote spokesman John Samuels.

He noted, however, that because the round hadn't been officially closed at that time, it was unclear exactly how much dilution the fund would suffer.

The fund had already lost money on a high-risk investment in now-failed ShoreBank, under executive director Andrew Davis--who is no longer with ISAC.

Henrik Fisker, CEO & founder, Fisker Automotive, at 2012 Fisker Karma event, Los Angeles, Feb 2012

Henrik Fisker, CEO & founder, Fisker Automotive, at 2012 Fisker Karma event, Los Angeles, Feb 2012

Common wisdom has it that if a venture fund can get one home run, and one or two singles, out of every 10 investments, it can prosper over the long term--though the other seven companies will be sold for parts or simply shut down.

But access to top-tier venture funds is strictly controlled, and investments in individual companies within venture portfolios is usually an all-or-nothing bet--as ISAC may be learning.

It's worth noting that no auto company has been successfully founded from scratch by entrepreneurs in the U.S. and survived even a decade since Chrysler was incorporated in late 1924.

More than 30,000 families in Illinois have put money into the $1.1 billion college fund, which offers contracts to parents that are to cover future tuition costs for their children.

But low rates of return under the new rules, combined with much higher increases in tuition costs, mean the fund now has a 30-percent shortfall of investment value versus future commitments.

The state of Illinois is not obliged to make up the difference.


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