How Venture Capital democratizes business?
Start-ups and venture capitalists are two aspects of the same phenomenon: the democratization of business financing. In the last two decades, it is recognizable the evidence of crowdfunding as the instrument to give the possibility to start a business at every moment, without relevant own financial means. Furthermore, crowdfunding has given the possibility to make the meeting between investors and entrepreneurs easier. This reality is becoming bigger day by day and this sort of wave is passing through every field. In addition to that, crowdfunding has completely changed the dynamics of the businesses that were ignored by venture capital funds. Traditionally, VCs tend to focus their attention and their money on high-tech entrepreneurship, which develops in specialized areas, such as the famous Silicon Valley. On the other hand, CF is a different and challenging way of funding even for the entrepreneurs that have developed a “non-tech” business, in particular for the “main street business,” such as retail stores, sometimes set up in underserved areas. A second trend shows that innovation has become more global and is no longer the exclusive domain of Silicon Valley. The success of crowdfunding led to accelerating this process.
A very virtuous example of crowdfunding in Italy was the one made by Winelivery. Winelivery is an app that permits the consumer to order wine and spirits just like the other delivery apps, giving him/her the possibility to choose from a wide variety of beverages. The owners were both young and needed funds to get started with their business. They have organized 3 stages of equity crowdfunding, all on Crowdfundme, one of the most famous platforms used for fundraising. In the first round, they gathered €150.000 in 2017, then they collected €400.000 in 2018, and the third round ended in 2020 with more than 2.5M € given. The valuation of the company in the third round was €7.2 million, and sales are constantly increasing, as evidence of the effectiveness of the crowdfunding company and this instrument at all.
This is all part of a process that is now undeniable: the first step of democratization is reality. We come from a past when investment and growth opportunities were given and sustained just from rich people for rich people. In this environment, there was a great lack of opportunities both for the ones who had revolutionary ideas but not enough money and even for the “little investors,” who wanted to take part in the investments but were not able to invest the necessary great amount of money. These days, we are seeing, on one hand, the birth of new start-ups, such as Konvi, whose purpose is to democratize the side of the market demand, making great investments (for example in luxury accessories such as watches, wines, etc.) affordable for little investors. On the other hand, a pioneer in this field is the Sweater Venture Capital Fund, which is now trying to enlarge the offer side, showing a new way to see VCS, making these entities much bigger and affordable for every type of investor and investment.
How Sweater democratizes Venture Capital?
The stock market used to be synonymous with the rich getting richer. Steep paywalls and high investment minimums made it hard for the average joe to invest on its own. That was until Robinhood came along. Robinhood’s commission-free trading structure and $0 investment minimum means any American who is not underage can invest in the U.S. stock market responsibly—or just gamble. This new structure forced competing brokerages to switch to similar business models, for better or for worse, they democratized a sizable area of finance. However, this “rich getting richer” stereotype remains true for private investments.
Nowadays, it is easier to dump all your life savings into a cryptocurrency named after a Netflix show and lose it all a week later than to invest in a young promising startup. Accredited investor requirements have kept the public from investing in the future through Venture Capital funds. The truth is, these regulations may have made sense decades ago, but they do not anymore. An infuriating problem that motivated Jesse Randall to found Sweater Ventures.
To overcome these shortcomings, Sweater needed to work closely with former SEC advisors, together they found a structure for the fund that would allow ordinary people to invest in it. Now, the question is will Sweater become the Robinhood of Venture Capital?
Of course, it is hard to tell, but that is what they are aiming for. When asked to describe Sweater Randall said, “Think of it as Robinhood for private companies.” That is quite a goal, for reference Robinhood has accrued 22.5M users as of now, in contrast, Sweater has 44k potential users on their waitlist. Even if all of them create an account and their average account size is twice that of Robinhood’s that would make for a just above average $305M fund. Ironically though, traditional VC firms do believe in Sweater, which raised a $2.3M funding round in July. Three hundred million dollars may not be enough to shake up an entire industry, but it is a crucial step towards the democratization of finance. Moreover, these may very well end up being conservative estimates.
The astute between you are probably thinking this is just crowdfunding with extra steps. Although Sweater may resemble crowdfunding because they strive for the same end goal, the means they are using to achieve it are nothing alike. Crowdfunding works under the JOBS act exemptions, these exemptions cap the total amount a company can raise at $5M annually including traditional investment routes. Sweater argues crowdfunding platforms often only offer subpar investment opportunities which cannot get Venture Capital funding. Beyond that, with crowdfunding, you must do your due diligence and thus are at a bigger risk of investing in something that seems promising on paper but offers no real returns. Instead, Sweater offers a fully-managed solution where all your investment is pooled up into a traditional Venture Capital fund with the only exception of a non-accredited investor’s ability to invest. This way, regular folks can be exposed to the massive upside provided by investing in startups through VCs.
This all sounds great but as with anything in finance, of course, there is a downside. The accredited investor requirement may not make sense anymore, but it is there for a reason. It is extremely common for early-stage investments to be fully lost, it is the norm, not the exception. Investing in Sweater should not carry any inherent risks in the way crowdfunding does. However, as with any other Venture Capital fund, there is no guarantee it will produce massive returns or any at all. Yet, we believe this business model is here to stay and part of the major democratization of the finance movement that is just starting.
There is no reason finance and business should be exclusively for the rich. Even though we have taken important steps towards eliminating this stereotype through democratization, we are nowhere close to fully solving these issues. Hopefully, the trend will continue and one day all that will matter for you to get a business off the ground will be if it is a good business, and all that will matter for you to give opportunities to those that deserve them through investing is whether you want to. There is no doubt this will be the future of business and finance; the question is when and how.
CB Insights. New York, NY, CB Insights. http://www.cbinsights.com/.
Unleashing main street entrepreneurship: Crowdfunding, venture capital, and the democratization of new venture investments. Regan M. Stevenson & Donald F. Kuratko & Jared Eutsler (2019)
Silicon Valley vs. Main Street: Regulatory Impact on Entrepreneurial Ventures. Liya Palagashvili (2020)