In Partners We Trust (or How to Solve a Chicken and Egg Challenge)

If you missed it, check out the article on Venovate by Deborah Gage that appeared the other day in the Wall Street Journal.

In the article, Deborah mentions two of our key partners – Provident Trust Group and Kingdom Trust Company. In addition to these great firms, we will soon be announcing partnerships with other trust companies that will total over 340,000 accounts and over $17 billion in custody. I want to expand a little on why trust companies are an important strategic fit for Venovate, and vice versa.

Chicken and EggIn creating any marketplace, there is a chicken and egg challenge: you need buyers to attract sellers and buyers won’t show up until there is something for sale.

Soon, when Venovate Marketplace goes live, we plan to have deals from some of the top sponsors in America. The WSJ article for instance mentions Draper Associates for venture capital, but we’ll also have real estate, natural resources and energy deals from sponsors of a similar caliber.

Distribution partnerships with trust companies are the other side of the deal. They are helping Venovate create a market by giving businesses on the platform access to a large pool of accredited investors, family offices, and institutions, many of whom are actively looking for private investments.

Unlike most IRA account providers, trustees like Provident and Kingdom don’t sell investments – they provide a self-directed retirement account and safeguard your assets. Self-directed IRAs are favored by individuals who do not wish to be constrained by the investment choices available in an IRA with a financial institution. At a bank they would be limited to bank products, at a brokerage firm to stocks, bonds, and mutual funds. However, in a self-directed account they can invest in private companies, real estate, gold, and many other types of legal investments that financial institutions don’t offer.

What’s in it for trust companies who partner with us?

Until now, it has been very hard to find a decent choice of alternative investments. There were plenty of opportunities out there, but it was illegal to advertise them. Until the JOBS Act passed in 2012, you had to hear about private investment opportunities from someone who already knew you and had verified that you were an accredited investor.

Under Title II of the JOBS Act, Venovate Marketplace is able to offer “crowdfinancing” opportunities to accredited investors – including most people with self-directed IRA accounts. The crowdfinancing concept is similar (yet different) to “crowdfunding” sites like Kickstarter or Indiegogo. The difference is that with crowdfinancing funders get a financial interest in the company. Depending on the deal, this could be equity ownership, a private bond, or even shares in a private fund that invests in alternative investments.

By partnering with Venovate, the trust companies give their clients access to a deep pool of investment opportunities and an easy way to invest in them. In return, Venovate provides access to a large group of people who understand alternative investments, are qualified to invest in them, and are looking for more choices. Which will attract even more quality deals.

So, our partnerships represent liquidity and a path to a vibrant primary and secondary market place, at Venovate Marketplace. Chicken and egg challenge, solved.

Crowdfunding over Coffee, Back in 1792

I often wonder how much business gets done at coffee shops. Every time I go into the Starbucks on Clay Street in San Francisco, right around the corner from our office, there are people working diligently on their laptops. I’m sure some are even trading stocks with their online broker. Soon, when Venovate Marketplace goes live, they will be able to invest in alternative investment opportunities as well. From a coffee shop, or elsewhere.

Turns out, trading stocks in coffee shops is nothing new. I was in our New York office near Wall Street last week and was talking with someone about the Buttonwood Agreement, the document that formed the New York Stock Exchange (NYSE) in 1792. My friend pointed out that it was an attempt to institutionalize the crowdfunding of its day. The signers of the agreement agreed to only trade securities with one another and charge a fixed commission to anybody who had not signed the agreement. I began to wonder what it was like before this agreement formed an exclusive investing club.

The list of the Buttonwood Agreement signers and their addresses includes one Hugh Smith who lists his address simply as the Tontine Coffee House. That aroused my curiosity, so I did a little digging.

Tontine Coffee HouseThe Tontine Coffee House was located at the corner of Wall and Water Streets, a few blocks east of where the NYSE now stands. It was where the 18th century New York crowd met to make any sort of deal, buying and selling cargo from ships that had just arrived at the nearby docks, raising money for commercial ventures of all kinds, trading stocks and bonds, playing cards, getting in loud – sometimes violent – political arguments, and drinking coffee. A traveler from England described it as:

“The Tontine Coffee House was filled with underwriters, brokers, merchants, traders, and politicians; selling, purchasing, trafficking, or insuring; some reading, others eagerly inquiring the news … The steps and balcony of the coffee-house were crowded with people bidding, or listening to the several auctioneers…”

It must have been like the NYSE and Chicago Mercantile Exchange (CME) trading floors combined with the floor of the House of Representatives – with everyone highly caffeinated. It was truly the first crowdfunding marketplace in the United States.

Marketplaces are nothing new of course – ancient Rome had the forum, Baghdad had the souq, and old New York had the Tontine Coffee House. People need a place to come together and make deals. Coming together makes markets more efficient by making information more accessible and price discovery easier. It gets everyone a better deal. Today, the market for almost everything is online. Amazon and eBay will sell you anything. Online discount brokerage firms like Schwab and E*Trade, and financial data sites like Bloomberg and Yahoo Finance have given everyone the access to the stock market that once only floor brokers and institutional traders had.

One of the few remaining pockets of face-to-face deal making has been the world of alternative investment opportunities. That’s because until recently it was not legal to offer alternative investment opportunities to someone you did not have a “significant relationship” with and knew to be accredited. The JOBS Act has changed all that, by making the general solicitation of alternative investment opportunities legal. Now, this market too is able to move online – to Venovate Marketplace.

Venovate Marketplace will offer access to alternative investment opportunities like private equity, hedge funds, direct investments in small and mid-sized companies, real estate, and natural resources deals. It will also provide an aftermarket where investors can obtain liquidity. If you want to be among the first to experience Venovate Marketplace, just sign up for our Beta. There is one slight disadvantage to an online marketplace – we can’t serve you coffee like they did at Tontine’s.

What Are Smarter Alternative Investment Opportunities?

If you’ve ever started a company, you know how hard it is to encapsulate your mission in a single name and tag line. You want something that will instantly express the unique benefit you are providing. If you’re Starbucks, that’s easy: Coffee. Everyone knows what coffee is and what it does for you.

For Venovate we landed on these two words: Smarter Alternatives. Let me explain you why.

The investing world is a bit more complex than a coffee shop. Most investors understand securities like stocks, bonds, mutual funds, and ETFs, and many people have walked away from them. That’s not surprising. The past 13 years have been brutal on Wall Street. The dot-com bubble, the financial meltdown of 2008, and the flash crash of 2010 have all but destroyed investor trust and confidence.

Investors want new, alternative investment opportunities. They want opportunities that are not linked to the volatility of the stock market, interest rate fluctuations, and the theater-of-the-absurd that Washington has become.

Venovate’s mission is to provide investors with those alternative investment opportunities. These are direct investments in privately-issued securities, or in funds that invest in things like:

  • Growth companies – including private equity and venture capital investments in early and mid-stage growth companies. These pre-public companies are where most wealth creation and job growth have come from in the past.
  • Real estate – direct participation in real estate and partnership deals offering both income and potential for appreciation, without the high correlation to the stock market or interest rate sensitivity of a REIT.
  • Hedge funds – offering exposure to a wide variety of investment strategies.
  • Fixed income – may include bundles of mortgages, student loans, distressed municipal securities and mid-market business loans. These deals offer a mix of low-volatility income and total return.
  • Natural resources – such as high-growth oil and gas exploration and production companies, income-producing timber land, or oil services firms. These deals offer the potential for growth or income without price fluctuations caused by the volatility of commodity prices.

Venovate Marketplace PreviewOnly institutions, family offices, and ultra-high net worth individuals have had some access to these types of opportunities in the past. Venovate is now bringing these alternative investment opportunities to an online platform called Venovate Marketplace. This will make it much easier for institutions to find opportunities and it will drastically expand the market to include all accredited investors and their advisors. Also, through our partnership with Provident Trust Group, these alternative investments can now be made in IRAs and other tax-qualified retirement plans.

Venovate is creating this marketplace so you can find a broad choice of alternative investments, research the details of each deal, communicate online with the sponsor, indicate your interest in deals you like, sign documents electronically, move the money, and receive your shares – all in one place. We are even creating an aftermarket exchange for these alternatives so you may be able to buy and sell deals in a secondary market. All this makes Venovate Marketplace a smarter way to invest in alternatives.

While alternative investments provide investors with a new dimension of portfolio diversification, they are not without risks. They are designed to be long-term investments and most are illiquid. Some, such as non-public growth companies and distressed municipal bonds, involve real risk to your principal. Venovate will give you access to extensive information about these deals for you to analyze. Be sure you understand the deal before you invest in it. These are private-placement securities intended for sophisticated investors. If you are not a sophisticated investor, we urge you to seek advice from someone qualified before you invest.

Venovate plans to create a secondary market in these opportunities, but today the market is very limited for these securities. There is no telling how active or liquid any market that develops will be. So you should not invest any money you’ll need in less than the time frame of the deal. These time frames vary from one deal to the next. Again, be sure to read and understand the information provided by the deal sponsors.

If you are like many investors – frustrated with the traditional investment choices and want a broader set of options – there are smarter alternatives and Venovate is providing them. You can be one of the first to experience Venovate Marketplace. Just sign up for our Beta. We’re curious to hear what you think.

The JOBS Act – Closing the Capital Gap to Create Jobs

Any economist will tell you that most job growth takes place among small and medium sized companies. For example, the November 2013 ADP National Employment Report showed that of the 215,000 jobs added in November, only 65,000 (26%) were in large firms. While the economy has been recovering from the crisis of 2008, job growth has been very sluggish. In response, Congress passed the Jumpstart Our Business Startups (JOBS) Act. Among other things, the act helps create jobs by removing some of the obstacles preventing private companies from raising capital and hiring workers.

ADP Report Nov 2013Since Venovate’s mission is to lead the way in capital formation for private businesses, I want to explain how this landmark legislation works and how it will help get Americans back to work. It will also create a new class of investors who will have access to a broader set of private investment opportunities than ever before.

Back in the 1970s, the founder of my former employer, Charles Schwab, borrowed money from his uncle to start Charles Schwab & Co. More recently, Steve Ellis started Chipotle Mexican Grill restaurants with a loan from his parents. Both of these companies have created lots of jobs. This is how many businesses got started – visionary entrepreneurs raised money from their friends and family.

The Charles Schwab story is particularly interesting to me because he took advantage of the deregulation of commissions in 1972 and started one of the first discount brokerage firms. Firms like Schwab, E*Trade, Fidelity, and TD Ameritrade gave a whole new kind of investor access to the stock market and created untold personal wealth in the middle class. I believe the JOBS Act will have just as profound an impact on how people invest as the end of fixed commissions did forty years ago.

Suppose you had a great business idea, but no rich uncle? You had a problem. It was illegal to solicit investment capital from the general public – people you did not already know – unless you registered your securities with the SEC or your state. Registration is expensive and not appropriate until you are ready to go public since you are just too small. In fact, the cost to go public is now so high, most private companies wait until they are very large to have a public offering. The days of investing in a small, publicly listed growth company may soon be over.

The other route is through venture capital (VC). Venture capitalists might invest in your company, if it needed a very large sum of money and had the potential to go public in just a few years. However, that is not the right path for many companies and most don’t need that much money to make it until they break even. The cost of venture capital in terms of ownership and control can be very high as well. VC funds need very high return on investment, therefore are only looking for multi-billion dollar ideas, and they demand a significant stake in your company.

The result is what I call the “capital gap.”

The VC model is breaking. It only works for a select group of companies. The flow of capital to innovative ideas has been choked off as venture capital funds have become larger and the time to a liquidity event has gotten longer. I believe there are plenty of great opportunities out there that have been unable to grow because they can’t get capital. Funding these ideas can rebuild wealth in the middle class and get Americans back to work. We just need a different investing model.

The JOBS Act closes the capital gap by allowing small companies to solicit funding from accredited investors – institutions and wealthy individuals. It gives small business access to a large pool of untapped money. Now, investors who want to put a portion of their money to work in small, fast-growing companies can choose among many business opportunities. They also have access to other alternatives for raising capital such as direct investment in natural resources and real estate deals, or even private equity, venture capital and hedge funds. All of these alternative investments form capital and create jobs.

This democratization of private investing presents challenges of its own:

  • How can entrepreneurs be sure potential investors are accredited?
  • How can investors be sure the company is legitimate? (those securities laws were made for a reason)
  • How can an investor sell his stock down the road if the company is not yet public?

Venovate is meeting these challenges. First, we are creating a safe space for entrepreneurs to present their opportunities to investors. We have a process by which potential investors are vetted to ensure they are accredited – before they can indicate interest in investing. We also provide a template for companies to present investors with the information they need to evaluate an opportunity and be sure it is right for them. We even let investors and entrepreneurs interact directly to ask and answer questions.

Second, Venovate will operate a secondary market to provide liquidity for investors. We are a FINRA licensed broker-dealer, and an SEC registered Alternative Trading System (ATS). As such, we are able to facilitate trades between early stage investors who want liquidity and those who want to buy pre-IPO stock.

We don’t claim to remove the risk from investing in private companies. These are small startup companies. Success is never guaranteed and there is a very real risk of losing money. However, we provide a place where investors can evaluate a broad range of opportunities and companies can give investors the data they need to make informed investment decisions. Our vision is an open, transparent marketplace for alternative investments.

The JOBS Act is a big topic and I plan to explore it in more detail in future blog posts. The best way to get a preview of Venovate is to request access to our upcoming Beta. Just complete the short form on the right.

Introducing Venovate

Hello everyone, I’m Michael Raneri, founder and CEO of Venovate – a new kind of investment firm that will change the way capital is raised forever. I’d like to tell you more about us.

JOBS ActIn April of 2012, the Jumpstart Our Business Startups – or JOBS Act – was signed into law. It has taken most of the time since then for the SEC to create regulations to implement it. Now that we have at least some of those regulations, the JOBS Act is ready to give individual investors and institutions a much broader pool of investment opportunities, and give people with great business ideas easier access to capital. Venovate’s mission is to make this exciting opportunity a reality by connecting startup companies with new sources of capital.

The JOBS Act has a number of provisions, but it is Title II, which lifted an 80-year ban on general solicitation for certain private securities offerings, that presents the immediate opportunity. Previously, any public solicitation to invest in a private company would need to be registered with the SEC. In this case, “public” meant people not known to you prior to asking them for money. In a sweeping effort to stimulate the startup economy, the JOBS Act makes the public solicitation of private investment by entrepreneurs much easier.

The key is that under Title II, these solicitations may be made only to “accredited investors.” These are either institutions or individuals who have a net worth greater than $1,000,000 not counting the value of their homes, or earn over $200,000 ($300,000 as a couple). Still, the removal of restrictions on public solicitation alone is enough to accelerate private funding efforts and allow startups access to funding resources they never could have touched.

At Venovate, we have seized this opportunity and we are building the world’s largest alternative investment platform for accredited individuals and institutional investors. A marriage of venture and innovation, Venovate is creating an online market that gives these investors access to exciting new investment opportunities.

Venovate Marketplace is transforming private equity by allowing business to focus on growth instead of fundraising. Investment opportunity profiles, business plans, and expanded visibility into a firm’s financial performance will be available to our large community of investors.

Venovate operates a FINRA licensed broker-dealer, and an SEC registered Alternative Trading System, or ATS. We are very excited to have Provident Trust Group as a strategic partner. From day one, Venovate Marketplace will have access to Provident’s deep pool of over 40,000 investors with more than $5 billion of assets in custody.  A great jump start to our Marketplace.

Early in my career I ran one of the first online stock brokerage services for Quick and Reilly. I then was one of the leaders of Charles Schwab’s online trading offering. Most recently I was CEO of Zecco – a major online brokerage firm. The JOBS Act is providing the same kind of revolution in investing that was created by the deregulation of brokerage commissions in the 1970s, and the invention of online stock trading.

Venovate is going to lead this new revolution and I’d like to invite you to sign up for our Beta. Be a part of the private investment marketplace for accredited investors!