Could traditional venture capitalists find themselves pushed aside by platforms that enable equity financing via crowdfunding? Opinions are divided. In late 2013 Ryan Kantor, a Chicago-based investment banking analyst at Lazard Middle Market, argued in a paper that for entrepreneurs, venture capital beats crowdfunding.
Earlier this year, however, Los Angeles–based research group Massolution predicted in its annual Crowdfunding Industry Report that investment flows from crowdfunding would soon outstrip those in venture capital. Worldwide, crowdfunding grew by 167 percent last year, to a total of $16.2 billion, the report found. By the end of 2015, Massolution expects that number to double, to $34.4 billion, which would overshadow venture capital’s $30 billion investment.
Venture capital veteran Stuart Rudick, founding partner of Mindfull Investors Venture Fund, has resolved not to resist the crowdfunding trend. In fact, he’s inviting the crowd inside.
In June Rudick’s Corte Madera, California–based firm launched Mindfull Crowd, which he describes as a hybrid venture capital/crowd-based investment platform. (He won’t disclose assets under management or names of investors, though he says his currently open fund manages about $15 million.) Through this online venue, accredited investors — in the U.S., those with a net worth of at least $1 million or earnings of at least $200,000 a year — can take equity stakes in Mindfull’s portfolio companies under the same terms offered to the venture fund’s institutional investors. Whereas most venture funds require hundreds of thousands or millions of dollars as a minimum investment, Mindfull Crowd’s typical minimum is $10,000.
The platform launched with one investment opportunity: Muse, an electronic headband designed to support brain fitness activities like meditation, offered by Toronto-based InteraXon. In early September Mindfull will open a second investment, FloWater, a Burlingame, California–based producer of purified-water refill stations, to the crowd.
The Mindfull Crowd structure is possible thanks to the Jumpstart Our Business Startups Act, which President Barack Obama signed into law in April 2012. The JOBS Act sought to help individual investors invest in private companies that they traditionally couldn’t access.
Some observers believe that whereas crowdfunding could become a notable addition to financing options for entrepreneurs, traditional venture capital will maintain an important role.
“Start-ups have so many financing options these days,” says Bobby Franklin, president and CEO of the Washington-based National Venture Capital Association. “We view [crowdfunding] less as a threat and more as an opportunity to strengthen and grow the entrepreneurial ecosystem. At the end of the day, there’s no replacing the intangible benefits — the mentorship, the networking, the strategic development — that venture capitalists bring to the table.”
Rudick has spent his career in the San Francisco area. In 1980 he joined boutique investment bank Davis, Skaggs & Co., where he worked as a partner and focused on companies that he thinks enhance their customers’ lives, especially those in health technology and health care. After Shearson Lehman American Express acquired Davis Skaggs in 1983, Rudick invested in North America’s first paper recycling plant and Buzzworm, the first environmental magazine. He then spent almost ten years as a partner at Bear Stearns Cos. before leaving in 1993 to start his own hedge fund, San Francisco–based Mindful Partners. (His current firm earned an extra “l” because he considers it the next stage of his investment career.)
Contributing Writer Katie Gilbert spoke with Rudick about the possibilities and pitfalls of crowdfunding, why the time is right and why Wall Street should pay attention.
Institutional Investor: What makes Mindfull Crowd’s approach to crowdfunding unique?
Rudick: What distinguishes us from pretty much all the other crowdfunding, equity-based platforms that exist today is that we are an investment firm. We’ve already invested in the companies that we have on the crowdfunding platform. We’ve got our skin in the game. The investor benefits from that investment prowess — and the fact that we’re a fiduciary, because we’ve got our own money invested, and we’re going to do everything possible to make sure that company’s successful.
How do you figure out what responsibilities a given company has to its investors, and what rights do they receive?
When we do a financing, it’s done on the same terms, valuations and with all the preferences that we offer in the institutionally led round. They’re not getting a different deal. They’re benefiting just as if they had been an institutional investor and were investing millions of dollars.
When we agree that we’re going to put a company on the platform, we structure it based on SEC restrictions that allow for 99 investors [the cap for a limited liability company]. Those investors have to be accredited.
We are in contact with every single investor, and we get to know them. We understand who they are and how they might be able to add value to a company. We’re not interested in somebody just because they’re going to put money in.
The company gets us as the general partner of the partnership structure, and all the investors invest through that entity. They do not have to hold the hands of up to 99 investors; we do. We tell the investors and the company that we will update the investors as we get updates from the company.
Do investors tend to want to weigh in on the company’s strategic decisions?
Depends on the person. Some people know an area and can be of value. One of the investors who shared in the first investment [Muse] made an introduction for the company to a strategic partner. Didn’t tell me anything about it. I got an e-mail from the company saying, “Stu, I think this came through you, yes?” I said yes. He said, “Wow, he just made a fantastic introduction for us.”
But some investors just want to invest, are happy just to get an opportunity and to have us be the fiduciary for their money. They know that they have to do little to no work because we’re doing it all.
Do you think this VC-meets-crowdfunding model will become more common?
My belief is that we’re still in the very early stages of this and the whole democratization of what’s going on in financial aspects of Wall Street. As I see it, the walls of Wall Street are coming down. We’re going to see so many more financial instruments that are going to be available to individual investors that will enable them to invest directly and not need to go through Wall Street.
It is beginning to happen with the VC community as well. Wall Street’s not going to go away. Venture capital is not going away. This is just another tool that’s expanding and enhancing the financial tools and vehicles that are available for both investors as well as the companies and entrepreneurs.
What are the returns like for individual investors on Mindfull Crowd?
There’s no difference between what the crowd investor has from a potential return on investment and what the VCs who invest in [companies] receive, because they’re investing on the same exact terms. So the upside is equal to what the VCs and institutions are getting.
As you know, VC investors are targeting returns like three, five or ten times on their money. The crowd will have the same exact investment opportunity. It doesn’t diminish it in any way.
Some say other venture capital or private equity firms might hesitate to invest in a business that has sold shares to investors through a crowdfunding platform. Is this a concern?
Most of the lead or institutional investors [in a company] are on the company’s board or have advisers to the board or have observation rights to the board. They’ve already negotiated those terms. So, having these additional investors doesn’t affect their role and leadership and impact on the company at all. Once again, it’s just an enhancement possibly.
I think there has been some fear from institutional VC investors that the inner circle is opening up, and they want to continue to control that inner circle. But they can’t stop it. This is the future, and this is what’s happening.
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