VC For Dummies
Are alternative investments really ‘alternative’ any more?
When asked about their future intentions, 44% of advisors said they plan to maintain or increase their allocations to alternatives in the coming year– and that figure jumps to 58% for RIAs with over $500 million in assets. Previously unusual asset classes are now being incorporated into client portfolios at unprecedented rates, with 84% of advisors using at least one alternative according to Investment News.
While alternatives aren’t taking the place of the more popular asset classes like equities and fixed income, they are quickly moving into the mainstream.
The recent Future Proof conference recognized this trend, by featuring five panels on alternative investments including ‘Investing in Venture Capital Made Easy with Fundrise and Allocate.’ The discussion was moderated by Craig Iskowitz, CEO of Ezra Group, and featured Saira Rahman, VP of New Investor Initiatives at Fundrise, and John Felix, Head of Emerging Managers and Director of Investments at Allocate as speakers. This article summarizes the in-depth conversation that covered how Fundrise and Allocate are lowering barriers to venture capital investing for advisors.
Fundrise: Expanding from Real Estate into Venture
Alternative investments, including hedge funds, and private debt and equity, continue to be major areas of opportunity. According to a recent BCG report, alternatives represented more than $20 trillion of global assets, or 20%, under management at the end of 2022, yet accounted for 50% of the asset management industry’s global revenues, generating more than $190 billion. This strong momentum is expected to continue with an estimated annual growth rate of 7% in alternative assets over the next five years.
Given this growth, it’s no surprise that successful alternatives platforms, like Fundrise, are looking to become one stop shops for advisors to access private investment funds. Fundrise expanded beyond their core real estate offering and recently launched a venture capital fund, Rahman reported. She claimed that they were the first robo-advisor to offer alternatives, and now have $7 billion in assets from half a million users.
“We’re an investor-first platform, meaning we think about our investors as part of our mission all day and every day,” Rahman attested. Building on their success as a B2C platform, Fundrise is now launching B2B offering with a focus on serving the growing interest in venture capital.
Originally the company started out as a crowdfunding platform, until they determined that they would have more success if they owned the investment vehicles as well. They changed their business model so that they manage the funds rather than aggregating investments to external funds. This enabled Fundrise to significantly lower the costs of underlying investments and accelerate investor rates.
Now one of the largest direct real estate investing platforms, Fundrise decided to own every element of their value chain. They source and underwrite all their own transactions, build out all their funds, have in-house joint-ventures, and manage all the investment vehicles. “Whereas a lot of fintech companies are primarily engineers, our engineering team is essentially as large as our accounting and finance teams — which are really the brains behind the operation,” Rahman explained.
When building out their new VC offering, the biggest challenge Fundrise faced was in branding, since they were historically known for real estate and private equity. But since the underlying products are similar in how their investment funds are structured, the technical build out to add VC was minimal, Rahman noted.
The demand for venture capital was high from the beginning, Rahman noted, so Fundrise had to restrict their top of funnel, using a waitlist to slowly open up access until they could handle a full user load.
Connecting with Other Platforms
The Fundrise team noticed a gap in the market for VC funds. Very few, if any, of them offered VC options. This gave them the impetus to build out a set of APIs to enable any fintech company to offer Fundrise products natively on their own platform. While there are other companies offering venture capital (such as Allocate), they do not offer API access, so it forces advisors to task switch between apps.
When advisors log in to their portfolio management platform, they’re now able to select Fundrise like any other investment. Eventually, Fundrise is aiming to offer white labeled private funds for any asset manager, according to Rahman. “At some there’s going to be a lot of asset managers that have these ideas that they will then be able to launch easily and quickly through Fundrise,” she described.
Allocate is an app that helps qualified investors, offices, wealth advisors, individuals, build out and leverage alternative portfolios, Felix explained. The company pairs curated access to high quality alternative funds with increased transparency and detailed portfolio reporting. Felix emphasized that Allocate takes a quality-first approach, accessing high-quality funds and then layering on software solutions to help solve some of the transparency reporting issues.
Why Venture Capital?
“If you believe in innovation and that it is only going to continue to accelerate, then you have to be investing in venture capital,” Felix contended. In the past twenty years, VC went from a cottage industry with around core 50 firms to over 2,000 firms.
According to data from Crunchbase, VC-backed companies raised over $29 billion in Q2 2023, a 34% drop from the $44 billion raised in Q1 2023. Economic uncertainty and low IPO activity continue to hinder the late-stage market. In a promising sign for the startup economy, half of the VC deals this past quarter were seed and Series A.
In the current market, companies are staying private much longer before they go public, and the kinds of returns that were possible previously when companies like Amazon went public are no longer possible. Companies are waiting to be at much higher valuations to go public, so the focus is more on value through private markets and getting in as early as possible. In a recent survey, 60% of financial advisors expect private markets to outperform their public counterparts over the next 12 months.
Felix offered the example of Stripe, a fundamentally generational company that’s been growing through the private market. If you bought into Stripe and wanted to make the same multiples as if you’d bought Amazon’s IPO in the 90s, it would have to become a $500 trillion company.
Challenges for Offering Venture Capital
Over the past decade, the amount of capital invested in private markets has increased dramatically, nearly tripling from $4.5 trillion to $11.7 trillion last year— but investing in venture capital is not without its obstacles. Venture funds are naturally riskier than other asset classes, and they’re symmetrically illiquid with long lockup periods that discourage potential investors. When you invest in a VC fund you commit to a certain amount of money upfront that’s then put into the fund over a three to five year investment period.
There’s a lot of dispersion in the venture industry, and not all firms are created equally. “Venture isn’t really an asset class, it’s more of an access class,” Felix noted. A small percentage of firms will always be outperforming the others by a significant margin, and it’s worth bringing in a knowledgeable party to make those choices and get the best returns.
In the past four years, top VC firms were outperforming median firms by 13%, which is tremendous difference. At the top decile, the number goes up to 27%. Therefore, it’s essential to partner with someone who is an expert and has the access to the best information and the best funds, Felix noted.
Felix explained that Allocate has worked to build out their analytic capabilities to support investors’ decision-making, and clients can view all of the firm’s due-diligence (both qualitative and quantitative) and rigorous analytics on the platform.
Lowering Barriers to VC Investing
One of the biggest hurdles to advisors incorporating venture capital into portfolios is a lack of education. Allocate runs a series of Venture 101 courses, webinars, and events to provide resources for advisors to help them navigate this risky and complicated asset class. Felix emphasized that they provide clients with a wide range of material to help them make informed investment decisions .
Fundrise runs its own set of education initiatives to support advisors and investors. Beyond education and information, Fundrise also decreased the minimum investment requirement, so clients can invest as little as $10 into a fund.
Looking to the future, Allocate is working to build a custom advisor experience platform with expanded analytics capabilities. Much of the venture industry is introducing AI reporting, but the standards are far from consistent. Felix believes that Allocate’s analytics will increase transparency and ensure that investors can fund good investments and fully understand their own portfolios — even outside of the Allocate platform. “We think we have a great offering, but we don’t want a monopoly on client portfolios,” Felix commented. “ We want clients to be able to source deals outside the platform and then help give them a holistic picture of what they own.”
For Fundrise, the focus is on democratizing investing in private funds. “We’ve seen valuations defined so precipitously and people are shying away from investments, so we think this is a once in a lifetime opportunity to be investing,” according to Rahman. They’re seeking out companies that are generational wealth opportunities and investing in them alongside Sequoia Financial and other large advisory firms.
Over the past few years, alternative funds have grown from fringe interest into a pillar of a well-built portfolio. Companies like Fundrise and Allocate have made previously inaccessible private investments like venture capital and real estate into high-reward asset classes that everyday consumers can engage with. As the market continues to shift, access to and interest in alternative funds will likely only accelerate and encourage vast innovation in the wealth management space.