February 6, 2021
Hello and welcome to Pipeline! This week: how to open up venture investing to the masses, how to build your new VC software stack, and the $159 billion company you've never heard of.
Robinhood and GameStop brought renewed attention to the power of retail public market investors, but a new fundraise from venture investor Arlan Hamilton and the Republic crowdfunding platform could make venture capital investing a much more common asset class for retail investors.
Hamilton, who has previously raised traditional venture funds and focuses on underrepresented founders, has raised $1.07 million in just nine hours through Republic's crowdfunding platform under a still-nascent form of crowdfunding called Regulation Crowdfunding (or Reg CF) — a first for a venture firm, according to Republic. The investors were not traditional accredited investors but rather anyone interested in investing.
This fundraising was done for Backstage Capital's (her venture firm) management company, not a venture fund. (Side note: Management company ownership is typically unevenly allocated among VC general partners, which makes Hamilton's move even more interesting.)
The relatively low limit of $1.07 million for a fund or a tech startup to raise through Reg CF may have limited the number of startups or funds that have tried this. But in March, the cap will rise to $5 million, the SEC announced in November.
The typical limited partner investors in venture capital funds are prestigious university endowments, large state pension funds, expert fund-of-funds and occasionally high-net worth individuals.
This new crowdfunding approach also could start to address a long held criticism of startups staying private so long: that only top VC firms get access to upside for startups, while public markets retail investors can invest after much of that growth has already been captured.
Some venture investors have looked down on crowdfunding, thinking that the best deals don't show up this way.
Do VCs feel threatened by this? Or is this an elitist thing?
Could more VC firms try crowdfunding? Hamilton thinks so. "I do expect more VCs to do this," she said. "Especially those who have less than $100 million under management today, because the economics are interesting, and I had a lot of inbound interest from venture capitalists at all sizes this week about how we did this."
This model works especially well for an investor with a strong community, Nguyen said. Hamilton already has Backstage Crowd, her syndicate community through which she raises SPV funds.
For a company to deal with managing a large number of investors — the average number of investors for a Republic deal is 1,100 since 2019 — Republic has built CRM-like tools that enable fundraisers to search among its investors, interact and get help with campaigns or other business needs.
There should be and are guardrails to protect retail investors, Hamilton said, because "this isn't a way to make rent."
Republic, which spun out from AngelList, has done crowdfunding in a variety of kinds of companies, which are all vetted.
While the promise of crowdfunding has taken years to take hold, it may be reaching a critical mass.
One thing we have realized is that COVID-19 has accelerated three transformational trends that already existed before the pandemic, but are now dramatically reshaping healthcare: the concept of a networked healthcare system, the increasing adoption of telehealth, and the idea of virtual care and guidance. At the same time, we have seen consumers becoming much more engaged in their personal health and that of their families.
Mike Jones is founder of Los Angeles-based startup studio and venture fund Science Inc., which has invested in companies such as Dollar Shave Club, Liquid Death and DogVacay — and also has a $270 million SPAC that recently went public. He was also once CEO of MySpace and founded Userplane, which was acquired by AOL.
What product or service are you totally, even irrationally, loyal to?
Notion, ChocZero and Burton.
What problem do you want to see a startup solve?
How much time do you have? As an investor, there are a few things that keep me up at night. Transforming small towns in the U.S. into job-producing tech centers. Converting plastic into fuel technologies. Clean eating and fitness plans that are optimized for longevity. Simple parental technology controls. The disruption of kids' lunches. And more sugar-alternative foods.
What company or startup sector is the most underrated right now?
I think city tech is underrated, but you'll see it blow up in a few years. The way we build and approach land, populations, transportation, hospitality, real estate — you name it — can be optimized for a more modern 21st century.
What's the biggest problem in venture and what needs to be done to solve it?
Providing shareholders liquidity and the SPAC boom mostly solve for it. By merging with a SPAC sponsor, companies can keep a stake in their business and access liquidity that they otherwise wouldn't have.
What's a secret obsession of yours that most people don't know about?
I am super active and love snowboarding, cycling and traveling across the globe with my family (not at the moment, of course).