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How do you attract family offices and other large investors to your direct investing platform?

One of the best business models ever is creating a marketplace between investors and investment opportunities. However, the challenge with this two-sided market is: how do you get the investors to show up? It’s hard enough to get the retail investors, but the family offices and other large check writers are even more challenging.

I’ve been meeting lately with more and more family offices interested in investing directly into companies, in lieu of via funds. As a result, I’ve started investigating some of the online platforms that enable direct investing, e.g., those focused on:

Tim Friedman, Founder, PEStack, observes that the interest in direct access to alternatives has been so strong that “platforms like Delio have emerged, which provide technology to allow institutions which already have relationships with buy and sell side to quickly launch robust private investment platforms. Delio built a ESG focused direct private investment platform for Barclays’ wealth management division, for example.” (Note that I specifically am excluding from this analysis the firms that help investors access investment funds, e.g., CAIS, Context365, iCapital Network, OurCrowd, Palico, PrimeAlpha, Trusted Insight. Investors there are outsourcing the decision-making about individual investments to the GPs.)

The table stakes for all these companies are to execute on the ‘jobs to be done’ that any competent direct-investing platform must provide, as compared with the option of investing in a fund: 

  • Control. The whole value of these platforms is that the investor can make active choices, not delegate entirely to a fund manager all decisions.
  • Administration, e.g., 409a valuations.
  • Data about the deals, i.e., investors want to be able to filter through all factors to identify the most relevant investments for their particular situation. The data about the investments needs to be accurate and formatted in a consistent way.
  • Compliance with the law. This isn’t trivial, as the law is complex and rapidly changing in this area. Cheryl Campos, Head of Venture Growth and Partnerships at Republic, said, “Republic is a legal innovator with five experienced attorneys on staff helping democratize investment.”
  • Traditional benefits of alternatives: Low correlation, illiquidity premium, etc.

Executing against these jobs is much harder than it looks. Ryan Caldbeck, Founder, CircleUp, wrote a detailed analysis: “Equity crowdfunding or equity investment marketplaces failed. Full stop. Didn’t work.” But of course, all of the smart people working at the firms I list would disagree with him.

The ideal situation is that the same people are participants on both sides of the table. Robert Blecher, cofounder of AltsforAll, observed, “AngelMD and Propel(x) have large networks of Healthcare/Biotech experts who both seek funding and fund each other within the confines of the site. Same goes for SMB investment sites like Honeycomb Credit, The SMBX, and Worthy Bonds (business owners often fund others) and Prosper or Sofi (many funders have borrowed themselves).”

Rob Leclerc, Founding Partner, AgFunder, said, “We think of ourselves as a media company with VC as a business model. We launched AgFunderNews, which has become the TechCrunch for food and agriculture. We also publish a lot of (free) investor reports and startup guides, and we have a weekly newsletter that goes out to 85k subscribers. We also host podcasts, and clubhouse clubs. Our name is in the news a lot and when it comes to foodtech or agtech SEO all roads lead to AgFunder — this builds the audience and established trust for when we do announce and because we already publish a lot of information, it doesn’t seem orthogonal for us do be doing it. It took time an energy to build but it creates an honest signal to the market that we’re the ones that people need to be talking to. Not dissimilar to a16z to be honest, which while less explicit, uses media in a similar way, thus raising awareness amongst LPs, founders, corporates, and downstream investors.”

I’ve identified a range of levers that platforms can use to attract more family offices and other large investors, specifically:

  • Comparable or lower fees than a fund. Investors on these platforms normally pay funds carry on a deal-by-deal basis, so their direct portfolio has to outperform the portfolio of a fund for the investor to do better, net, than they would investing directly into a fund. Trillium Jeong, CEO, WealthBlock.ai, observes, “The investors are really replacing external due diligence with their internal effort. Assuming they are paying platforms for the “sourcing” effort, the right performance comparison would be based on direct portfolio performance net of internal due diligence cost vs. fund performance, net of fees.”
  • Credible originators, i.e., the lead investor who sets the terms. Investors on these platforms are highly reliant on the judgment of the deal lead. Because that lead normally earns carry on a per-deal basis, they have a motivation to be more risk-taking than they might be if they were operating out of a fund platform. 
  • Social validation: Show me other smart peers are investing alongside me.
  • Consistency. It’s much easier to evaluate a group of investments when they’re presented in a consistent way.
  • Transparency. Both at point of entry and thereafter, investors want to know what’s going on with their money.
  • Education. Proactive investors appreciate the chance to learn more about the sector in which they’re investing. Arno Niazi, CEO, GoingVC said, “Take, for example, our Venture Capital learning and development program, which now has more than 250 global alumni. We support that with an active Slack community and a venture scout program.” Eric Woo, co-founder, RevereVC, said, “If you can capture interest and traffic through a content strategy, then you can drive that traffic to the deal portal.”
  • Convenience, e.g., mobile access; same platform for all documents.
  • Direct and preferably public interaction with deal sponsor/issuer. Many crowdfunding sites have no mechanism for this. Some, e.g., CrowdStreet and RealCrowd, do allow direct interaction. Jeong pointed out, “FINRA requires licensed funding portals to provide a public forum/Q&A session where platform users can ask issuers questions directly.”
  • Useful tools for originators, e.g., Carta, Long Term Stock Exchange, AngelList, Alphaflow. These follow the classic community-building principle of “Use the tool, stay for the community.”
  • Community. Investors value learning from and interacting with thoughtful, neutral investors, preferably assessing the same investment as you. Cheryl Campos said, “Republic offers educational events such as Angel Investing 101 and more specific investing modules around gaming and real estate. We also have in our community 100+ Venture Partners, mostly VCs in the space. We host private events, such as meetups and professional development sessions, as well as communicate through an active slack channel.” Some community models to study:
  • Pay interest on undeployed cash. Firms like MaxMyInterest can enable this.
  • Elite networks. Brent Beshore, CEO, Permanent Equity, tweeted, “After getting invited to two private Slack investor groups and one on WhatsApp, I’m becoming convinced that private, interest-specific social networks are the future. The sharing is a magnitude order higher signal. Twitter, LinkedIn, etc. are becoming auditions.” Suggestion: make very public your red lines as to who can participate in the network, at what level. If you don’t, everyone will assume that the group is thoroughly ungated. As a model, see AsktheCircle, which puts their criteria on the home page.
  • Automated matching with client’s specific needs, particularly risk management. For example, Stratifi* offers a tool for wealth managers to customize the risk exposure of a retail client. 
  • Ongoing information rights. Marco Cesare Solinas, VC Analyst with Blue Future Partners, said, “I believe the most important “lever” to attract investors is to give them the opportunity to track some companies for some time before the actual round: a tracking platform where investments are made gradually through monitoring companies over time.” Investors are much more comfortable with investments when they have encountered them before. By keeping a client apprised of progress, you increase the odds that they’ll invest. 
  • Exclusivity. Republic* advertises investments with a ticking clock countdown. Investors like luxury goods, not broadly available. 
  • Transparent due diligence memos written by credible lead. An interesting model: ARC Angels Fund, an unusual VC in which the LPs are also collectively the GP. Individual LPs in ARC earn more carry by adding value to the investing process, e.g., sourcing deals; writing due diligence memos; accelerating portfolio company value.
  • Tax minimization. Jeong points out that, “CrowdStreet successfully used their list to target people who just sold their property with 1031 Exchange offerings.”
  • Aligned interests. This is the premise of the classic merchant bank model. Even if the platform commits that it will invest from its balance sheet to fill only a few percentage points of the syndicate, that boosts credibility. 
  • Leverage platform network to increase returns. As a model, OurCrowd taps their investor network for introductions on behalf of portfolio companies. For more ideas, see How Private Equity and Venture Capital Investors Increase the Odds of Portfolio Company Success.
  • Produce income for platform members. For example, I helped build Goldman Sachs’ Special Situations Group Chambers Street Executive Network. This is a pool of senior executives who can be tapped as board members, interim execs, etc., for Goldman Sachs’ portfolio companies. Effectively, it is a private expert network. 
  • Strong internal tech stack. For ideas, see Tech Investors Eat Their Own Dogfood: How Private Equity and VC Investors Are Using Technology to Make Better Investments.
  • Netting of fees, so that investors get the netting of fees of a traditional fund, but the ability to pick winners of a direct investing platform. This could get very complex mathematically and hard to explain, given different SPV lifespans and the risk of clawbacks. I haven’t seen a model to do this, although I presume it’s theoretically possible.
  • Insight into an investments’ fit into an investors’ broader portfolio. Tiger21 has demonstrated that people will pay 5 figures to share their entire personal financial situation with a room of peers in a “financial X-ray”, in order to get frank feedback. 
  • Curation/filtering. An endless array of people are glad to take investors’ money; increasing the signal to noise ratio is valuable. “Investors don’t need more deals; they need institutional grade, unique, fully vetted deals, with appropriate risk/reward,” says Cliff Friedman, CEO of ShareNett. “Investors want platforms that provide ease of access and curation, supported by independent due diligence.”
  • Targeted sharing of events. For example, each member could have the ability to mail ‘[email protected][firm name.com]’ information on events in NYC geared to fellow investors: dinners, parties, etc. Most people like attending selective events, and the best events are marketed to very limited audiences. 
  • Virtue signaling, novelty, or passion. I list above the platforms in the art & collectibles space, which are based heavily on this premise.
  • Frank vendor assessment. It is valuable to have a place where members can see frank reviews of all categories of related vendors: private banks, tax advisors, etc.

Gil Silberman, cofounder of Forge, points out that it is rare for a single company to offer all of these in one place. “Private investing, as an industry, is still going through early cycles of disruption before coalescing around dominant service providers with comprehensive solutions. Until then there is a lot of innovation and experimentation, with investment platforms offering narrow solutions addressing a single, defined need, doing one thing well instead of trying to do it all. As the industry matures you’re going to see a lot of integration plays, putting together things like data and analysis, discovery, settlement, compliance, fund management, trading platforms and exchanges, all from different sources that hopefully work well together, and eventually some consolidation as larger concerns put it all together under one roof.” 

Additional resources:

Further reading: 

* Disclosures: I’m an investor in Republic and Stratifi via HOF Capital, where I was formerly a Managing Partner. Blue Future Partners is a member of the Advisory Board of ff Venture Capital, where I was formerly a Partner. Thanks to Emrah Yalaz and Robert Blecher for comments.

Previously published in Techcrunch.

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