The JOBS Act is now four years old and the crowdfunding industry is beginning to mature. SmartBrief met with Crowdfunder Co-Founder and CEO Chance Barnett and newly minted President and COO Steven McClurg earlier this week at the Milken Institute Global Conference to hear their thoughts on the JOBS Act and trends in venture capital. The pair also shared their insights on the VC Index Fund the firm launched last month.
Tell us a bit about the origins of the VC Index Fund that Crowdfunder just unveiled?
First I will start with the problem that is solves and then I will talk about the really big opportunity.
The problem it solves in that this new world of equity crowdfunding and platforms; how do you know what you are investing in? If you are an investor sitting at home who for the first time gets access to investing in new deals and entrepreneurs at a super early stage, it is hard to be certain. The VC Index Fund solves that problem by taking institutionally vetted, sourced and invested deals and allowing people to invest behind that, so they ride along all the work that great venture capitalists are doing. They get in to those deals at the same terms. So we are providing unprecedented access that people didn’t have before.
The VC Index Fund also creates the first opportunity for people to invest alongside a large, diversified set of VCs that are the people who are picking winners at a relatively high rate. These are very high-performing funds. This diversified opportunity is important because at the early stage where we are investing – which is seed, Series-A venture deals – the data shows VC-backed deals only become home run unicorns about 1.28% of the time. But funds invest in 30 to 40 deals per fund. If you do the quick math, the probability of hitting that unicorn is very, very low. What we are doing is creating a more diversified fund to harvest the market returns at the early stage.
What are the mechanics behind which VCs are selected to be in the fund?
Steven McClurg: We have a list of the Top 50 tier one VCs that we will change each quarter based on our thoughts on them and the model. Only one of those funds has to be involved in a deal for us to be able to follow behind them.
Which sectors of VC activity have caught your eye the most lately?
McClurg: We are seeing a lot of tech because VCs are interested in that area, but some of the more interesting deals are focused on consumer products and health care, particularly health tech.
Barnett: Our fund is general, but we do have internal focus areas that we try to make sure we are hitting. Digital health is a huge one. Fintech is also a focus area and it is also an area we understand since we are a fintech company. We see the giant market trends in those areas. What we also love about those spaces is that you don’t have to depend on the giant homerun IPO. … Banks are one of the largest acquirers of companies these days. They are buying innovation and they are buying talent because they might not successful at growing it in-house. So we love fintech. We can invest early enough at a valuation that makes it so that if they get bought for $100 million, we are still getting a great return for the fund.
In the same way that we see finance being disrupted across the board through policy changes, changes in behavior and the new ways investors are trying to get access and invest, we see the exact same thing unfolding with health care. From freeing up patient data to empower the individual, to large existing corporations investing in innovation and doing startups because they are tired of buying billion dollar companies; we see a really interesting range of innovation happening in health care. It is largest industry in the country outside of government. The market is so giant and the returns can be so great that is a really attractive area for early-stage investment. When you add in the digital component that is disrupting the various sectors within health care, there is disintermediation happening everywhere. It is a ripe ground and it is barely the first inning of that.
The JOBS Act just turned 4 years-old. What are your thoughts on how it has played out thus far?
Barnett: We have mixed feelings. That’s actually how I started Crowdfunder. I was getting involved in the legislative policy initiative in Washington, D.C. It has been a long haul and has taken a while. I guess you might say it is a rapid pace for government, but glacial pace for startups.
We’ve been really happy about Title II, which is taking accredited investing as it exists under Reg D offerings and move that same regime online in a very light-weight way. So it has accelerated very rapidly, but now as we are looking to include non-accredited investors in the market, there are two portions of the JOBS Act that are enabling that. There is Reg A+ offerings under Title IV. Those have some really appealing dynamics and the regulatory requirements of that for a company that is a bit mature are actually pretty great for allowing them access capital and raise up to $50 million. So that’s interesting, but that’s not really focused on early-stage startups.
Early-stage startups to us are people looking for something like $250,000 to $2 million. They are at a very early stage and don’t have complex financial controls or even a CFO.
The other part of the JOBS Act that was intended to be the true small-business startup legislation piece is Title III. It hasn’t been implemented, but it is coming on May 17. We are pretty disappointed about the onerous requirements for startups. They have to have audits and associated costs can be $35,000 to $50,000 just to raise the first $100,000. We see it as a non-starter for a lot of startups, especially the hot startups that can access Angel and venture capital. They are not looking to spend six months and a lot of regulatory cost; plus oversight for the duration of their company when they can just access capital through the private markets off-line. So we think there will be a bit of a selection bias just because of the way it was implemented. So we are disappointed in the non-accredited piece that is being implemented under Title III.