Venture 101: How to Get into Venture Capital

Category
Venture 101
Written by
Garrett Bryant
Published on
December 3, 2021

Investors today fall into two categories—accredited and non-accredited. Being non-accredited simply means an investor doesn’t meet the SEC accreditation requirements, or in other words, that investor hasn’t made $200k+ for the last two years or doesn’t have at least $1 million in net assets (not including their home).

In August 2020, the SEC passed amendments to the accredited investor definition, adding:

…a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order.

This addition gives the SEC a lot of leeway to continue expanding the definition so more folks can qualify as accredited investors. It’s unclear how many investors now qualify, but it’s definitely a move in the right direction for this antiquated requirement.

If You’re Accredited You’ve Got the Most Options

By simply meeting accreditation requirements, you’re free to invest into a venture capital fund, equity crowdfunding, or as an angel investor into individual private companies. With that said, VC firms and private startups seeking funding from angel Investors traditionally hold investors to an extremely high minimum investment—both usually well over $100k. Startups need a lot of capital to get going and change the world, and VC funds need a lot of capital in order to offset the high risk of VC investing by spreading investments across multiple companies.

But Don’t Worry If You’re Not Accredited

Based on the definitions outlined before the amendments passed last summer, it’s estimated there are currently around 13 million households in the US meeting accreditation requirements—about 10% of American households. Even including the marginal number added by the updated definitions, it’s still a slim fraction of the retail investor population, so don’t worry. You’re not alone.

And every year more fintech companies and investing platforms are leveling the playing field. In the last few years, a number of alternative investment platforms have opened new asset classes to unaccredited retail investors, including real estate, art, hedge funds, and even farmland.

No matter which category you fall into, there are ways for anyone to invest in venture capital such as equity crowdfunding, angel investing, SPVs, and venture capital funds.

Angel Investing & Equity Crowdfunding

Equity Crowdfunding & Angel Investing

Angel investing and equity crowdfunding are similar in that you buy equity shares in an individual private company or startup. They differ in that angel investing typically requires high investment minimums and accreditation status—in other words, very wealthy investors—while equity crowdfunding is open to all investors.

Equity crowdfunding can be a great way for you to dip your toes into private equity, but it’s not the private market access you really want or deserve.

  • Investing Limits: The SEC limits the amount anyone can invest on an equity crowdfunding platform, accredited or not. Basically, if you make less than $107k per year, you can only invest up to either the greater of $2,200 or the lesser of 5% of your income or net worth, and if your income or net worth exceeds that $107k threshold, you can you can invest up to 10% of your income or net worth, whichever is less, up to a total limit of $107,000.
  • Your Own Time & Due Diligence: It’s up to you to research the companies listed and make sure they are a viable investment. Investing in the private market is risky, and if you’re putting your hard-earned cash into one bucket, make sure it will count.
  • Only What’s Listed: You can only invest in the companies listed on these platforms, which often aren’t the venture-backable companies you really want to invest in. Those unicorns and high-potential startups typically go with VC firms and wealthy angel investors who can cut the big checks.

So if you’re really asking how to invest in venture capital, crowdfunding isn’t the answer. And if you aren’t extremely wealthy, then angel investing is off the table. There is, however, a middle ground for accredited investors in the form of SPVs.

Investing with SPVs

Special Purpose Vehicles (referred to as SPVs) are one of the most common ways for accredited retail investors (sorry unaccredited folks!) to break into VC investing because the buy-ins are significantly lower than a traditional VC fund or angel investing. They also give their investors (also referred to as limited partners or LPs) better control over their investment, since the investment thesis is clear with a single company as a target.

Companies like AngelList have streamlined this process so fund managers (also referred to general partners or GPs) and startups can reach more LPs and funding with ease. GPs use an SPV to pool smaller investments from up to 250 LPs to invest into an individual startup. If you’re considering any SPVs, just be aware that they come with their own risks and limitations within the VC space.

  • High Carry & Management Fees: SPVs can include higher carry and management fees than most VC funds, which is something to consider when investing your capital.
  • Lack Diversification: SPVs are used to invest in a single company, and that company may fail.
  • More Work: It’s a good practice for any investor looking at an SPV to conduct their own due diligence as well, since it is a very high-risk investment. This means more work for you.
  • No Voting Rights: LPs investing through an SPV will not receive any voting rights in the company that SPV invests in—that power will reside with the GP managing the SPV, so it’s important to have trust in your GP and their investment thesis.

SPVs help create more access to the private market for accredited investors who can’t afford the risk of high buy-ins with traditional VC funds and angel investing. And you can diversify by investing in multiple SPVs, which tends to be a strategy for many—that also means investing much more of your capital and much more of your time.

So a fund might just be a good fit after all, and good thing there’s now a VC fund fit for all.

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Sweater Breakdown

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Disclosure: Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectus contains this and other information about the Fund and can be obtained by calling 1-888-577-7987 or by visiting the Fund’s website at www.sweaterventures.com/cashmerefund. Please read the prospectus carefully before investing. All investments involve risks, and past performance is no guarantee of future results.