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Protocol Pipeline
The inside story of the venture capital and startup world by Tomio Geron.

VC for the masses

VC for the masses

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.

Overheard

  • One LP wants three unicorns to come out of each seed fund. Valuation and exit sizes are rising, and so are LP expectations.
  • Crazy funding stories: Exploding term sheets, vomiting babies, bathroom accidents and much more.
  • When VCs take content marketing to a new level: VCs posted six-pack photos of themselves after the gym. (I spared you a link here.) If you have no idea what I'm talking about, good job avoiding the VC Twitter thirst traps this week!
  • Breaking into VC. How one startup founder went from meetups to Techstars, launching his own VC fund.

The Big Story

Opening up VC to everyone

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.)

  • This means any carry or profits made through Backstage's funds will go to the management company and then be split among Backstage general partners and these new investors, who will get about 10% of management fees and 10% of carried interest.

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.

  • Under typical SEC rules, venture funds (and startups) can only raise from accredited investors.
  • But Reg CF opens this up to a wide range of investors.

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.

  • But Ken Nguyen, CEO of Republic, points to several hot deals on Republic, which were also backed by top venture investors.
  • And Hamilton said "the line between crowdfunding and VCs is blurred because founders have more and more options than ever, and it's more and more about the person and not the establishment or the aesthetics."

Do VCs feel threatened by this? Or is this an elitist thing?

  • "I've never understood why VCs looked down on crowdfunding, except that it gives people a more democratic way of doing things, and that could feel and seem like a challenge to them, to what they have established," Hamilton said.
  • "But it shouldn't. We should embrace all types of fundraising as long as it's legal and sound and [makes] sense, because we all need each other at the end of the day."

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.

  • "It's a new model for VC," Nguyen said. "Arlan is very forward-thinking. She has a very strong community. You can look at it not as a startup, but I'm a VC investment adviser and here is a way for my fans to back me."

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.

  • Outside of Republic, this community model has worked for some emerging venture investors such as Jason Jacobs, who have built a community around a topic and then leveraged that group to help do deals.

There should be and are guardrails to protect retail investors, Hamilton said, because "this isn't a way to make rent."

  • "There should be a limit to how much they can invest per year, like there are on Reg CF. There should be some sort of education confirming that you have information, which Republic does very well. And everyone should be encouraged to only invest what they can afford to lose. I spent a lot of time … just letting people know this is not a get-rich-overnight situation. You should only invest what you can afford to lose. It should be for fun, education, experience, impact."

Republic, which spun out from AngelList, has done crowdfunding in a variety of kinds of companies, which are all vetted.

  • That includes skin care companies to highly-sought tech startups to, more recently, real estate deals to a sort of index fund of deals.
  • The types of deals that are appropriate for retail investors all depends on the interests and passions of the investors and their risk profile, he said.

While the promise of crowdfunding has taken years to take hold, it may be reaching a critical mass.

READ NOW

Philips

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.

Read more

Inside Track

  • VCs should face their fears and go big, not go for easy wins, said Meera Clark.
  • How does a distributed seed stage VC firm use software to collaborate? Here's Weekend Fund's stack (with templates), per Vedika Jain.
  • David Beisel and Rob Go at NextView start a newsletter for junior VCs looking to work their way up.
  • Chris Paik on the seven core motivators for startups, and other VC investing frameworks.

Need to Know

  • Diversifying LPs. Acrew Capital launched a growth fund to increase diversity of limited partner ownership in emerging companies.
  • They're back. After the blowup of August Capital, David Hornik and others are back with Lobby Capital.
  • Secondary deals. Carta launched CartaX, its exchange for secondary startup shares.
  • ByteDance rival. Kuaishou, the startup you probably never heard of, went public on the Hong Kong Exchange at a valuation of $60.9 billion and was valued at $159 billion at the close of first day's trading. It was the largest IPO in venture firm DCM's history; the firm held 9.2% prior to the IPO. Sequoia, DST and Morningside also held stakes.
  • From Protocol: Foreign brands have a new fast-track into China's market: the addictive app Red.
  • This week in VC history: Just a year ago, companies started to pull out of tech conferences.
  • Your weekend reading: After a decade of rapidly falling costs, the rechargeable lithium ion battery is poised to disrupt industries.

Making Moves

  • David Lee, once an investor at top Valley firm SV Angel, is now head of Samsung Next.
  • VC banker Samir Kaji left First Republic Bank to run an unnamed company focusing on fundraising for emerging managers.
  • Andreessen Horowitz hired former Twitter exec Sriram Krishnan as a general partner.

Five Questions With...

Science Inc.'s Mike Jones

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).

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