White Paper – Going Direct: A New Paradigm in Venture Capital Investing
The goal of this paper is to provide institutional investors, managers, and originators with a greater understanding of best practices for leveraging FinTECH to overcome inherent challenges with direct investing: liquidity, adverse selection, diversification, volatility, performance, scalability, access to best managers, and valuation.
Institutional adoption of FinTECH platforms in the P2P sector has been robust. Prosper’s (leading P2P originator) lending origination grew by 347% in 2014 (YOY) issuing $1 billion worth of loans in just 6 months surpassing the $2 billion mark for the first time in the fall of 2014. Highlighting this accomplishment, it took Prosper 8 years to reach its first $1 billion in originations. Ron Suber, President – Prosper, terms this explosive growth “Escape Velocity” or escaping the gravitational pull of traditional lending practices and constraints (~banking industry).
And what accounted for Prosper’s escape velocity? Institutional capital! Hedge funds have been the primary catalyst for Prosper crossing the $5 billion mark in loan originations (October 2015). On the equity side, institutional capital is gaining access to early-stage technology and scaling capital primarily via investor syndicates (~online venture funds) participating both as "lead" syndicators (~Arena Ventures) and members of syndicates managed by esteemed investors.
Like P2P, the ultimate success of equity crowdfunding relies on “convergence” or institutional investor adopting technology to source, invest, and manage investments on a direct basis and via online venture funds (e.g. AngelList Investor syndicates). Though Limited Partners continue to invest primarily via GP/LP structures (a byproduct of familiarity with fund investing and recent alpha returns generated by the bull market, robust M&A/IPO environment), direct investing adoption is accelerating. Recent statistics demonstrate this movement; 5% of LP’s are investing on a direct basis and is expected to grow to over 15% by 2017. As part of this co-investment movement, LPs increasingly are staffing to evaluate opportunities internally guided and co-investing alongside of General Partners without incurring the obtrusive “2” and “20” fee structures.
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