How to Invest in Startups With the World’s Best VCs
Table of contents
Lately we’ve been noticing lots of ads on Facebook about investing in some exciting-sounding startups that are trying to solve some grand problem. Click through the ad and it’s almost always some equity crowdfunding platform telling you about some can’t-miss opportunity to invest in the next
Microsoft Tesla. We recently warned our readers about the dangers of equity crowdfunding, mainly that you’re not investing alongside well-networked venture capital firms. Here’s why that’s such a big problem.
We Need VCs to Invest in the Best Startups
Prior to investing in any startup, a venture capital (VC) firm will conduct an extensive due diligence process on the startup’s financial structure, business model, and leadership team. When an investment is made, they’ll help push that startup towards an exit. The VC’s network provides connections needed to find businesses, grow them, and exit them. When you’re not investing alongside VCs, you’re not investing in the best startups out there. If one in ten startups fail, don’t you want to improve those odds as much as possible? As retail investors, we’re in no position to be evaluating the potential of any given startup based on some vaguely stated investor deck.
Not being able to properly evaluate equity crowdfunding offerings is just one problem, but a bigger one is liquidity. Most of these platforms have no secondary markets, so you’re stuck waiting for a startup to exit with no promise that they ever will, and no VC in the background prodding them along. That’s why equity crowdfunding seems more akin to speculating than investing.
The other way to invest in pre-IPO startups is by using investment platforms such as SharesPost or EquityZen. You can buy shares in some of the biggest unicorns out there using these platforms, and you can even invest in a portfolio of startups. The problem is that you’re still not investing alongside a VC firm. You’re not getting the valuations they get, nor can you be sure you’re investing at an ideal time.
About Alumni Ventures Group
Founded in 2013, New Hampshire-based firm Alumni Ventures Group (AVG) is a venture capital firm that is democratizing access to invest in deals alongside some of the best venture capital firms out there. AVG currently holds about 450 startups in their portfolio and is one of the most active venture capital firms on this planet with their fingers in more deals than most. The reason for that is their investing approach which is stage and industry agnostic – from pre-seed to pre-IPO stage. They’re exclusively co-investors, meaning they don’t lead rounds, negotiate terms, or sit on boards. That frees up lots of time so they can run lean and invest in lots of deals over any given year. Here are some of the names they invested alongside last year:
Google Ventures, Andreessen Horowitz, Khosla Ventures, New Enterprise Associates (NEA), Kleiner Perkins, Accel Partners, 500 Startups, Sequoia Capital, FundersClub, Y Combinator, General Catalyst Partners, Bessemer Venture Partners, Greylock Partners.
Entrepreneurs who take money from AVG can benefit from access to a community of 550,000 people including alumni from the world’s top universities.
Let’s look at the investment opportunity for retail investors.
Why Invest In Startups?
Many institutional investors such as endowments and wealthy family offices often allocate 5-15% of their portfolio to venture capital investments. That’s because alternative assets aren’t strongly correlated to the stock market and can perform well when other asset classes don’t. VC investments also outperform dramatically over the long term.
AVG keeps their investment minimum to $50K (higher for a few select funds) to make their funds accessible to a wide set of accredited investors.
As for fees, AVG charges an amount equivalent to a 2% management fee for the fund’s 10-year term. The fund sets aside that total amount—20% of the investment—to pay management fees rather than burdening their clients with repetitive follow-ups for unpaid fees. Here’s how the process typically works using a $100K investment as an example.
- $80K is considered investable capital, $20K is set aside for fees.
- They invest ~$60K-70K within about 12- 15 months in a diversified portfolio of about 20-30 venture deals (or about 200-300 if in their Total Access Fund).
- They’ll keep ~$10K-20K to invest in follow-ons that they typically invest over the first 36 months of the fund.
- Ten years of your fees ($20,000 in this example) are set aside by AVG until drawn.
- They have the ability to draw upon or borrow against these fees at any time.
- As distributions occur, they send all proceeds back to you until your $100K capital contribution is returned.
- Any profits beyond your $100K capital contribution are split 80% to your and 20% to AVG
Even if your investment portfolio extends beyond 10 years, you’ll never pay more fees.
AVG offers a number of funds for the accredited investor looking to add some startup equity exposure to their portfolio.
Alumni Venture Capital Groups
The best business schools in the world are notoriously difficult to get into. Once you’re in, you now belong to an exclusive club where people help each other – typically after graduation when gainful employment is achieved. Like it or not, the school someone attended will come into play in many companies during the hiring process. Why? Because the people who attend these elite institutions understand how difficult it is to get in. It’s the same way financial firms will try to hire associates from investment bank summer internship programs who didn’t make the cut. You know these people have already undergone an extremely rigorous vetting process that someone else paid for.
It’s an unspoken rule that alumni help each other out when the situation arises. You’ll have a much higher response rate cold-calling people who went to the same school you did. The propensity for alumni to network and share resources among each other is why AVG has created little mini venture groups that cater to alumni from the world’s best schools.
People who haven’t done squat with themselves often try to paint these institutions as “good old boy” clubs where admittance guarantees a life of Ferragamo ties and bottles of Domaine Romanée Conti over long lunches in London. This couldn’t be further from the truth. When you begin attending these schools, you quickly join hundreds of other viciously competitive people who are all jockeying for a higher place in the competence hierarchy. Alumni from these schools are probably already accredited investors because they’re extremely conscientious individuals who work even harder to navigate the viciously competitive corporate environments where they eventually become employed.
If you attended any of the schools listed above, go to your people. Plunk down the 50K and enjoy the benefits of your exclusive membership. You’ve earned it.
For the rest of us commoners, there are some other options to invest alongside AVG.
The Total Access Fund
AVG’s Total Access Fund (TAF) gives you a portfolio of all AVG deals invested over one quarter or one year, your choice.
- Quarterly TAF offers ~50-75 deals invested over one quarter; $50K investment minimum
- Annual TAF offers ~200-300 deals invested over one year; $100K investment minimum
If you have a net worth of $1 million, a $50K investment is just 5% of your overall portfolio. Your investment will be diversified across stage, sector, and geography.
That’s AVG’s broadest and most diversified fund, but they have offered others as well, many of which are already closed. Currently, they have a “Seed Fund” and “Deep Tech Fund” that are open for accredited investors with the latter focused on many target sectors we cover such as AI/machine learning, blockchain, robotics, VR/AR/MR, genomics, advanced materials, longevity, and others.
Investing in startups alongside some of the world’s most notable venture capitalists gives you the opportunity to generate alpha that’s not correlated to the rest of your portfolio. If you’re an alumnus, it’s a great way to network with your peers as well. Maybe someday they’ll start taking investments from non-accredited investors. Until then, we’ll just need to start working a whole lot harder.
Become a premium member and get access to hundreds of premium articles, reports and additional content.
Nanalyze Premium is your comprehensive guide to investing in disruptive technologies. Read by the top investment banks, management consultancies, VCs, and research houses. Trusted by over 100,000 institutional and retail investors. Covering disruptive technologies for nearly two decades.