Venture Capital (VC), a form of private equity focussing on early stage start-ups with high growth and valuation potential, seems to be on a pedestal for start-up founders. You want to grow? You'll need venture capital for that.
Whilst in certain instances, particularly in business to consumer (B2C) where the cost of acquiring a customer (CAC) is high and revenues low, venture capital is an extremely useful avenue for the founders. Having said that, it's not for everyone, as mentioned in a previous newsletter.
Venture capital, often seen as an invite-only boys club, seems to be entering a bit of a golden age of evolution, both in terms of widening the pool to open up a fund, as well as to private investors looking to get exposure to the VC asset class.
Rolling funds
There's been a huge trend recently in what the industry is calling 'Rolling Funds'.
Rolling Funds are funds which are always open (hence 'rolling') and to which their investors contribute funds quarterly. This is a seismic shift away from the traditional venture capital 2+20, 10 year fund model, which sees a lot of work going in to raising a massive round to sustain the fund for 10 years, as well as to provide enough capital to deploy in various startups to see that moonshot investment to provide Limited Partners (LPs) a return on their investment, which is the whole reason the VC asset class exists.
So rolling funds result in a less 'lumpy' fundraising process, but it goes deeper than that. If you're an aspiring fund manager, from an average background in terms of median household income, chances are you're going to struggle raising a £50m round from institutional LPs. You're unlikely to have the network (although like anything, there are exceptions to this rule). The benefit is that you can raise smaller amounts from lots of investors through platforms such as Angel List. This makes it easier for emerging managers from unconventional backgrounds to raise funds to start their fund.
From the LPs perspective, a rolling fund means there's no awkward second half of the 10 year term associated with traditional funds. These years typically see VCs keep their remaining powder dry for follow-on investments and to then start gearing up for raising their next fund. This could result in missed opportunities, opportunities that a rolling fund would be able to capitalise on.
Democratisation of venture capital
A few years ago I bought a few shares in Draper Esprit plc, a venture capital firm listed on the LSE (LSE:GROW). Like other investors, I was keen to get some exposure to early stage start-ups in a diversified way. What I didn't appreciate at the time, was how rare this was and how innovative Draper Esprit's model truly is.
The good news is that this appears to be changing.
Recently, Passion Capital, a VC firm, raised money through crowdfunding on Seedrs. This meant that non high-net worth individuals could invest sums as little as £25 into Passion Capital, opening up ownership for a fraction of what would otherwise be the case. This gives investors access to the asset class, but it also gives Passion Capital a new avenue for fundraising, one that does not contain as many meetings and pitches. This looks like a win-win.
Passion Capital isn't the only fund to raise funds through crowdfunding. Stateside, the exact same thing occurred, with Arlan Hamilton's Backstage Capital raising funds on Republic. This gave similar exposure to the VC asset class for those in the US and further strengthens Backstage Capital's commitment to serving underrepresented communities (the exact type of investor who wouldn't typically have the funds to invest as an LP into a VC fund).
For any readers looking for a dose of inspiration, Arlan has no formal education and was homeless when she founded Backstage Capital, what can only be described as a successful seed stage venture firm, serving those underrepresented founders that the incumbent firms were not doing nearly as well as they should be. This piece by the LA Times provides a nice overview of her journey to VC.
This is great - locking off venture capital, and the high returns it can provide (admittedly for higher risk), from those who are not super wealthy, restricts the potential returns available for regular investors. This is why bitcoin and other cryptocurrency coins are super popular at the moment. They provide a way for those of us with an average income to see a healthy return on their investment and essentially levels out the playing field.
Investing in firms like Passion Capital, Republic or Draper Esprit is a great way to get exposure to the wider VC asset class, without having to do thorough due diligence on a single startup and putting all of your eggs into that basket (which you can do with both Seedrs and Republic, although both will take some sifting to find promising investments).
Everyone and their dog wants in
News broke a few weeks ago that Jake Paul, Youtuber turned influencer turned aspiring boxer, has started his own rolling fund.
This is the downside to making venture more accessible. You get an unsavoury individual leveraging his fanbase to further his wealth. For those unfamiliar with Jake Paul, he's been reprimanded for posting age inappropriate content on his channel (viewers of which are mostly underage), he was found guilty of looting during the 2020 George Floyd protests, says the N-word casually, and says that Covid is a hoax. Jake has created several pyramid scheme-type structures, scamming his fans out of money before, so it's not beyond the realm of possibility for this to happen again.
And here lies the rub. Democratising venture capital is great for giving emerging fund managers (and amateur investors) access to the asset class. But startup founders need to tread carefully, as you may end up with Jake Paul on your cap table, which is not far off brand assassination in my view.
In the words of Kendrick Lamar, how much a dollar really cost?
To provide some balance, Jake Paul is partnering with serial entrepreneur Geoffrey Woo, for the fund, called Anti-Fund. So you could say that Geoffrey is the brains behind the operations and he may be more trustworthy than Jake Paul, so your money will be safe. I still have my doubts. What is certain though, is that the kids who are spending their time creating wacky videos and building loyal audiences are starting to take over every industry, whether we like it or not.
Parting shot
The democratisation of venture capital is long overdue and much needed. Amateur investors should be able to get exposure to the asset class, and there are lots of Arlans out there who deserve to empower underserved communities of founders, bringing wealth to these communities.
In the round, this is a huge positive, but I hope there are going to be far more Arlans and no more Jake Pauls.