Venovate takes crowdfunding beyond technology, launches a marketplace for non-VC alternative investments
We live in an era where technology is changing the way capital and investment opportunities intersect. Since the passing of the JOBS Act, we’ve seen this trend most profoundly in the way that early stage businesses raise seed funding (and everyday investors access those deals), but also around real estate and other alternatie asset classes. For the most part, these shifts have occurred largely in the consumer or retail investor space. It’s about time that marketplace-style crowdfunding makes its way up the food chain to institutional investors.
Today, San Francisco-based Venovate is announcing a new platform aimed at affecting precisely this type of disruption. The company, which is spin off of erstwhile startup crowdfunding platform Xpert Financial, aims to connect family offices and other high net worth accredited institutions – but not retail investors – with opportunities to invest in hedge funds, private equity funds, growth stage companies, energy projects, and other non-VC alternative investments. Today, the company is listing its first two opportunities, and has another dozen in various stages of due diligence.
“When we started Xpert, the goal was to connect high net worth investors with opportunities to invest in private companies,” former Xpert CEO Tom Foley says. “But the timing wasn’t great and we actually found that the market was both too small and too slow. If you look at where the smartest investors allocate their money – the Harvard and Stanford endowments, CalPERS – they allocate up to 40 percent of their funds to alternative investments, but just 1 to 3 percent of that goes into VC. There’s trillions of dollars per year invested in non-VC alternative investments. That’s where we’re focusing our attention.”
Venovate is a classic marketplace, and as such faces the chicken and egg problem of attracting both investors and deals in equal proportions. To solve the first half of this equation, the company has partnered with Las Vegas-based Provident Trust Group, a institutional asset management company that oversees some $5 billion in qualified assets across more than 30,000 accounts. The company has secured similar joint marketing relationships with six other trust companies, bringing Venovate’s total audience to 330,000 accounts and $17 billion in assets. With willing investors on board, acquiring deal flow has proven to be none too difficult.
As part of the Xpert spin out, which seeded Venovate with both a broker dealer and an RIA license, the company also gained the endorsement of Xpert investor and Draper Fischer Jurveston founding partner Tim Draper, who has committed to bringing “hundreds of millions in deal flow,” according to Foley. Foley is taking the title of President at Venovate, while the company’s co-founder and Chief Executive is online brokerage pioneer Michael Raneri who was previously the CEO of Zecco and before that had stints at the NYSE, Charles Schwab, and Fidelity.
“This industry was created by a small change to the securities laws in the 70s, deregulating commissions and leading to the creation of online brokers like Charles Schwab and eTrade,” Raneri says. “Now, the JOBS Act has for the first time allowed general solicitation and removed the need for ‘meaningful relationships’ between funds and their investors. We’re looking to break down these small, manual marketplaces and bring a new class of investor into private securities."
Asset managers have been eager to participate, according to both Foley and Raneri, who point to the benefits of gaining access to new classes of investments and the ability to outsource deal sourcing and due diligence as the key selling points. Venovate hopes to offer these investors a familiar experience, mirroring its dashboard and tools after online stock brokerages and offering transparency and reporting not commonly associated with alternative investments.
"Fund managers have also been incredibly receptive to what we’re building,” Foley says. “They see us as a source of lower cost capital. We’ve seen how AngelList Syndicates works in the early stage VC space, but there’s just as much if not more inefficiency in other alternatives categories.” Venovate is working to standardize documents, implement modern technology like signatures and escrow, and otherwise drive efficiencies, Foley adds. “The hardest part of recruiting deal flow has been getting compliance departments to sign off."
As a broker dealer, Venovate does preliminary due diligence, including legal, accounting, and principal background checks on all deals that it offers through its platform. The process costs the company as much as $5,000 per opportunity, but this is a small price to pay for maintaining its reputation. Venovate gets paid either via a one time placement fee on capital raise (typically in the case of a private company fundraise or a closed end fund), or via an ongoing asset management fee (when raising for an open-ended fund).
Foley and Raneri have assembled a lean 10 person team that spans technology, financial services, legal, and sales and marketing. The company is in the process of raising a $2 to $3 million seed round using its own platform, and has thus far secured $1 million from Studio9+ founder Peter Relan, acting as its lead investor, and Provident. The offering will close at the end of July, at which time Raneri expects to significantly expand the team and further build out the platform.
Venovate is in a unique position given its access to accredited investors and its focus on non-VC alternative investments. But the company won’t be without competition as both startups and traditional financial institutions seek to plant their flag as this multi-trillion dollar category shifts into the digital age. In the financial services game, companies are only as good as their reputation meaning Venovate will need to prove that it can consistently match savvy investors with high quality deals. It’s one thing to say that you’ve got the goods, and Raneri and Foley certainly talk a good game, but delivering on these promises won’t be easy.
It’s a fair bet that someone will create a marketplace for institutional alternative investments. And given the network effects at play, it’s likely that there will be just one or at most two winners. Venovate is entering the market at the right time and with strong pedigree. The rest will come down to execution.