Some venture investors have looked down on crowdfunding, thinking that the best deals don't show up this way.
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. But Reg CF opens this up to a wide range of investors.Under typical SEC rules, venture funds (and startups) can only raise from accredited investors.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. But in March, the cap will rise to $5 million, the SEC announced in November. 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. 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.(Side note: Management company ownership is typically unevenly allocated among VC general partners, which makes Hamilton's move even more interesting.) This fundraising was done for Backstage Capital's (her venture firm) management company, not a venture fund. The investors were not traditional accredited investors but rather anyone interested in investing. 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 FFS is also open to investing in funds above Rs 1,000 crore corpus as long as a fund’s investment manager is a domestic entity, the key persons or managers had managed funds to which Sidbi had made commitments in the past, and exposure is capped at the same level as applicable for a fund with corpus of Rs 1,000 crore.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. The FFS, as per Sidbi letter, will consider paying a higher management fee after taking an overall view on the total expenses, and if a fund is women-led, focuses on women-led startups, priority areas, agro-rural sector, financial inclusion, and is committed to invest in tier-2 and -3 centres. The share of carry would be 30% (of the incremental return) if the fund achieves an IRR of above 30%. The FFS is now ready to pass on 25% of the incremental returns (over and above the new IRR) if the IRR exceeds 25%. The ‘carry’ or the profit sharing (once the fund’s IRR crosses the hurdle rate) is typically in the ratio of 80:20, with 20% going to the manager. Since AIFs often take a long time to mobilise capital from other investors, a quicker drawdown of the money committed by the FFS will enable that the deal making capability of AIFs is not hampered. Sidbimanaged FFS has been one of the most important domestic institutional investors in Indian VC Funds and the liberalisation of many existing onerous terms in the investment agreements will help in aligning such terms with those prevalent globally,” said Tejesh Chitlangi, senior partner, IC Universal Legal. “These are concrete steps to ensure that investments by the FFS in eligible Indian AIFs can be on better commercial terms when it comes to management fee, carried interest for the qualifying and performing fund managers, whilst also extending more flexibility to fund managers in their day-to-day operations. In a letter dated April 29, 2022, Sidbi told AIFs that it would allow “accelerated drawdowns” of the money committed by the FFS while fund managers achieve internal rate of returns (IRR) higher than the hurdle rate - the minimum return a fund has to clock in before profits can be shared between investors and fund manager. Sidbi is the country’s largest limited partner (LP) or investor contributing to the capital of VC and PE funds.
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