July 17, 2017

Crowdfunding 2.0


Venture capital provides financing to early stage emerging companies with high growth potential in exchange for equity / an ownership stake. The risks VCs take investing in disruptive technologies or business models yield higher returns their limited partners (or investors) require. As these companies grow, they create employment / jobs and the economy prospers. Since beginning of the 20th century, venture capital has been the domain of wealthy individuals and families. A typical LP based in a venture fund would be institutions, pension funds, endowments, family offices, etc. 

However, the 2008 Financial Meltdown led to a liquidity crises for entrepreneurs, companies, LPs, & VCs. Fewer IPOs in the market means no exits for VCs, no returns for LPs, and as a result venture funds were on a decline. No new funds means less startup funding, low employment, and slow economic growth. Thus on April 5, 2012, President Obama signed, The Jumpstart Our Business Startups Act (the JOBS Act),  which enables crowdfunding for “accredited” Americans. An accredited investor is an individual with an income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income OR have a net worth exceeding $1 million, either individually or jointly with his or her spouse, excluding the primary residence, qualifies as an accredited investor. For an Entity, any trust, with total assets in excess of $5 million qualifies. 

Crowdfunding is a practice of funding a project or venture by raising contributions from a large number of people, typically via the Internet. The market is flooded with various types of crowdfunding options like donation, reward, lending, equity, royalty, and even hybrid versions. The two most popular types of crowdfunding methods are reward and equity. For rewards based crowdfunding, entrepreneurs pre-sell a product or service to launch a business, and some times even in return for gifts or thank you notes. For equity crowdfunding, the backer receives share of a company, usually in exchange of the money pledged. In case of NIN.VC, it would be limited partner interest in the NIN Ventures Technology (QP) Fund.

While the Obama Administration achieved success with the JOBS Act by creating jobs for the Economy, it also did a disservice to the people of United States by encouraging crowdfunding in companies directly, which exposed them to a high degree of risk with such an asset class. With the traditional venture capital investment process, we were all indirectly invested in a venture capital fund via a pension fund or institution. Those pension funds and institutions had a diversified portfolio, on top of that they were investing in the venture funds and not companies. So what is the difference between crowdfunding in a company directly and fund or NIN.VC? 

01. Diversification
A fund or NIN Ventures Technology (QP) Fund makes multiple investments in companies in different sectors (i.e. 3D Printing, Cloud Computing, Education Software, etc.) during Series A and / or B financing, this strategy helps diversify the fund’s portfolio, which is not the case when one invests in a company directly. Think of it as investing in a Mutual Fund vs. Stock.

02. High Risk
Given it’s diverse portfolio the fund reduces it’s risk, where as direct investing in a company exposes that investment to higher degree of risk, an appropriate analogy would be to put all your eggs in one basket. A logical follow up argument would be, what if one makes multiple direct investments in companies of their choice using a Crowdfunding portal over investing in a fund? Given 90% of the startups fail, even if one invests in several companies via a Crowdfunding portal, it becomes solely a numbers game i.e. Quantity over Quality. On the other hand the fund management invests in an Entrepreneur because Entrepreneurs build companies and not the other way round. We (NIN.VC or any venture fund) not only provide adequate financing (including follow up financing rounds and access to our syndicate partners), but also lend our domain expertise and network of partners to help companies with recruitment, PR and marketing, and a viable exit strategy. 

03. Professional Management

Direct investing in a company requires time, expertise, due diligence, constant follow up and / or monitoring. On the other hand NIN.VC acts like a financial advisor and works for the investor and in the fund’s best interest. The fund also provides quarterly audited financial statements to the investor on the progress at the fund.

04. Board Representation

A $1,000 direct investment in a company using a Crowdfunding portal does not give an individual enough rights, while a venture fund or NIN.VC takes board seat on all their investments. Thus we are in the loop with the company management when it comes to keeping tabs on the progress at the company and is in a position to help / make suggestions on several occasions, gauge and be a part of the valuation process when it comes to addressing dilution and follow up financing rounds. 

Currently majority of crowdfunding investors are pouring their money investing in companies exposing themselves and the American Economy to a high degree of risk, with a 90% start up failure rate. And since 2014 the crowdfunding industry has grown from $16 billion to an estimated $34 billion in 2015 and is doubling or more every year, and according to the World Bank estimates, crowdfunding will have a global market of $96 billion by 2025 - 1.8 times today’s global venture capital industry. Does replacing smart money with crowdfunding justify its short-term effect or the JOBS created? Did Americans bail out the U.S Economy or are we waiting for another bubble? Watch Ms. Desai's video to learn more about NIN.VC, how we are solving a major flaw with Crowdfunding, what are the benefits of Crowdfunding from both an Investors and Entrepreneurs perspective, investment strategies, importance of diversification, etc.

Given the long-term (5-10 years) venture capital investment cycle, we will probably not see the negative effects of crowdfunding for few more years. However to make matters worse, recently, the SEC approved Title III JOBS Act, Equity Crowdfunding for "non-accredited" investors, which allows any U.S. citizen, regardless of income, to make direct investments via a crowdfunding portal. But, investment in a fund, like ours, is still limited to accredited investors. Are American people given the wrong kind of freedom when it comes to their investment decisions? Given funds are a less riskier asset class compared to crowdfunding in companies, perhaps it’s time to revisit their investor eligibility, alter the definition of an accredited investor, truly democratize venture capital and make crowdfunding available for everyone...

While there is a major flaw with crowdfunding in general, it does allow investors to direct invest and enjoy direct returns in an investment of their choice, which is not the case with a traditional venture capital investment process. Ignorance is bliss and partial knowledge can be dangerous, thus besides proper investor education, emphasis also needs to be given to FAKE NEWS or media outlets that might be influencing American people. When investing in public company stocks, investors have stock estimates and research reports from various different analysts, which is not the case with private company investing. More startup / technology coverage by media outlets will create investor awareness on this topic. However, journalists must act responsible and should be required to attain a license or certification to cover such stories.

About NIN Ventures (or NIN.VC):
NIN Ventures is a unique and first of its kind crowdfunded technology venture capital fund that invests in series A & B rounds of 3D printing, the 4th industrial revolution, cloud computing, financial services, education software, and other disruptive technology companies. NIN Ventures Technology (QP) Fund is available to "accredited" individuals / firms for a minimum amount of $100,000 using multiple investment options like self-directed IRAs, defined benefit plan, digital currencies (E.g. Bitcoin, Litecoin, Dogecoin), or a regular checking / savings account.

NIN.VC is offering membership interests under the JOBS Act & Regulation D of the US Securities Act of 1933. This offering is being made via general solicitation and general advertising, which is permitted by Rule 506(c) as contemplated by Title II of the JOBS Act. This rule came into effect Sep 23, 2013 and we were the first ones to go live with a website and videos about our fund. NIN Ventures also became the first venture fund to be seen on a billboard, which was followed by in taxi ads and other social media facilitated marketing. Learn more about us on FacebookTwitterLinkedInNIN Ventures TV, etc. 

NIN.VC has been the recipient of several awards including Wealth and Finance International Magazine's "Best Technology Venture Capital Fund - Illinois" for the Alternative Investment Awards, the "Best Crowdfunded Technology Venture Capital Fund - US" for the Fund Awards, and “Leaders in Private Equity – Illinois” by Corporate Vision magazine to name a few. NIN.VC has been featured in VentureBeatChicago TribuneChicago Sun TimesForbesIncWGN's After Hours with Rick KoganNBC Weekend Web with Charlie WojciechowskiBloomberg's Taking StockCrowdfund Insider, and CIO Review to name a few.