Glen Anderson Of Rainmaker Securities Discusses Why Family Offices May Invest In Late Stage Venture Capital

With capital preservation often a key investment consideration for many family offices, investment in the venture capital asset class is often considered too high-risk. However, investing in Unicorns (venture capital-backed private companies that are valued $1 billion or more) is typically a less risky strategy than investing in seed and early stage companies. Unicorns more often have proven business models, global brands, substantial revenue, and profitability.

Also, many Unicorns are world beating companies, leading the most disruptive technology trends occurring in the world economy. By waiting for a public listing to gain exposure, Family Offices are likely missing the most important years of value creation.  A sample case in point is the ride-sharing market. Private ride-sharing Unicorns have raised approximately US$25 billion since 2010 and have a combined market capitalization of US$120 billion (Source: ValueWalk).

What are the Risk/Return benefits of Investing in late Stage Venture investing? 

According to the Cambridge Associates Growth Equity Index, funds that employ late-stage venture investing strategies have produced 10.57% and 14.3% returns for the past 10 and 25-year period, respectively, versus 6.95% and 9.17% for the S&P 500 index respectively.

What are the Investment advantages for the family offices?

Key advantages of investing in Unicorns via private secondary markets are:

• Invest in mature companies with proven business models and well-funded business plans
• Get exposure to the equity earlier in the company's growth cycle
• Experience a shorter expected holding period versus investing as an early stage venture investor

What are the two main structures commonly used in the Sector?  

• Direct method: Investors purchase shares from selling shareholders by getting the approval of the company to transact. Brokers organize/match buy and sell orders. After that the seller notifies the company of the proposed sale and once approval is granted, then the seller and investor sign a purchase agreement. The buyer then funds the transaction. As a final step, the company updates their share ledger and transfers the shares to the buyer, providing the buyer proof of ownership, closing the trade.
• Special Purpose Vehicle (SPV) Method: The broker identifies a group of matching trades in the same security, and then creates an SPV to take custody of the shares. An offering memorandum is prepared and investors subscribe and send funds to the SPV. Once all the funds are received, the SPV notices the company to allow the SPV to transact as a single buyer. Once the company approves the transfer, the SPV purchases the shares from the selling shareholder(s), the company updates its share ledger and provides the SPV proof of ownership, closing the trade.

What is the typical transaction size and range:

A typical transaction size is in the range of $2 million - $10 million. For family offices and investors to obtain the most competitive pricing/terms, the typical transaction size is in the range of $5 million to $10 million. Larger transactions can typically be consummated via the Direct Method. For smaller transactions, the investor would typically need to transact through an SPV structure since companies will typically not approve small transactions.  

What are the fees involved in transacting in Private Secondary Transactions?

Depending on the transaction size and complexity, commission and fees range between 3% and 5% of the transaction amount. Lower commission percentages are associated with larger transactions. In most cases, the commissions are paid by the selling shareholders. However, there are certain situations whereby the investor pays the fee.  

What are the risks involved in transacting in private secondary transactions?

The following investment risks are present when compared to investments in public equities.

• Lack of liquidity
• Higher volatility
• Less information on current state business performance
• More complicated transaction structures

Conclusion

Many Unicorns are leaders of their respective market category, with proven business models, global brands, large and growing revenue and profitability. As such, they form a separate risk category than what is more traditionally considered venture capital investing. Yet, despite their maturity, many have and continue to generate outsized value creation for their shareholders. Consequently, investing in Unicorns can be a powerful source of alpha to a well-diversified portfolio.  

Disclaimer: This document does not represent an offer to sell or a solicitation of an offer to buy any security. Any such offer must be made pursuant to a private placement memorandum or other definitive legal documentation prepared by the company offering the securities (the "Offering Documents"), and the securities are only available in states in which the offering of the securities is registered or is exempt from registration and only by a broker/dealer authorized to do so. This document contains excerpts from the Offering Documents, and should be read in conjunction with the Offering Documents prior to making any investment decision. The securities offered in the Offering Documents ("Securities") are offered through Rainmaker Securities, LLC – a registered broker dealer, Member FINRA/SIPC, 11390 West Olympic Blvd., Suite 380 Los Angeles, California 90064 ("RMS"). These Securities involve a high degree of risk, are speculative and involve a high degree of risk. The Securities have not been approved or disapproved by either the SEC or any state agency, nor has either the SEC or any state securities commission endorsed the accuracy or adequacy of the referenced Offering Documents. Any representation to the contrary is a criminal offense. An investment in these Securities should not be made by any person or entity that is not in a position to lose the entire amount of such investment, or one who needs liquidity of the investment. Only individuals and entities qualifying as "accredited investors" or "qualified institutional buyers", as defined by the Securities Exchange Commission ("SEC") are allowed to invest in these Securities. Potential investors in the company should carefully consider the risk factors contained in the Offering Documents to evaluate the company and its prospects before purchasing the Securities. This document and the referenced Offering Documents both contain forward-looking statements that are not historical facts, and are based on the company's attempt to describe the outcome if it executes well on its business plan. They are not guarantees of future performance and are subject to risks and uncertainties beyond the company's control or ability to predict. Potential investors are cautioned not to place undue reliance on these forward-looking statements, which reflect the company's management's view only, as of the date of this document and the referenced Offering Documents.

SOURCE Rainmaker Securities