Affluent Investors Explore New Ways To Finance Startups, Small Businesses

A range of companies and services are creating new ways to connect entrepreneurs in need of capital with investors who have the money.

Angel-investor funds, new venture capital investments and crowdfunding platforms are just a few of the ways money is flowing into startups and small businesses.

Wealthy individuals have long sought to participate in so-called alternative investments such as private equity and hedge funds. Now investment firms are running commercials on Bloomberg Television that tout forgetting the old 60-40 allocation between stocks and bonds to tout that a portion of one’s portfolio should include alternative investments.

Dave McClure of 500 Startups said this week that the bubble might be in the shares of publicly traded stocks, pointing to the $3 billion Wal-Mart (NYSE: WMT) is paying for Jet.com or General Motors (NYSE: GM) paying $1 billion for Cruise Automation.

Of course those pricey buyouts whet the appetite of wealthy investors as they see, in hindsight, the wisdom of backing startups early. After all, who knew the premise of selling razors by subscription was a billion-dollar idea, at least in the eyes of Unilever, which is dropping a cool billion to buy Dollar Shave Club?

For those who want to get in on the action early, several avenues are opening up to them.

Keiretsu Capital, an affiliate of the angel-investor network Keiretsu Forum, said this month that it raised $4.2 million on its second angel co-investment fund, bringing total capital under management to more than $10 million.

Of the $4.2 million, Keiretsu Capital has put $850,000 to work in 13 technology and life science startups already backed by top angel groups, including the Keiretsu Forum, said Randy Williams, founder and CEO of the Keiretsu Forum and a managing partner of Keiretsu Capital.

An angel capital fund makes it easier for wealthy investors to diversify their investments across several startups.

“The Keiretsu co-investment funds build highly diversified portfolios of investments, each of which have been through the extensive due diligence processes and have commanded the on-going support of experienced and organized angel groups,” said Matthew Le Merle, managing partner at Keiretsu Capital. “This provides risk mitigation that is nearly impossible to accomplish when investing directly in early-stage technology companies and provides access for those who are not themselves angels.”

Keiretsu Capital is now raising its third co-investment fund, with plans to raise $50 million from institutional investors. Williams said he expects participation in the third fund to include several “strategic” investors, such as companies that want a front-row seat to innovation occurring in their industry. That echoes San Francisco-based CircleUp’s partnership with Procter & Gamble, (NYSE: PG) General Mills (NYSE: GIS) and Johnson & Johnson (NYSE: JNJ) as that firm connects wealthy investors with entrepreneurs pursuing innovation in consumer packaged goods.

New regulations promoting the crowdfunding of businesses also hold promise for investors to finance startups and small businesses.

Sausalito-based Breakaway Funding is among the firms working with entrepreneurs and investors to take advantage of crowdfunding.

Wefunder, a San Francisco-based crowdfunding portal, said a survey of small business owners found that just 1 percent of respondents were aware of the new crowdfunding regulations.

“We knew awareness was low, but we didn’t think it was that low,” said Nick Tommarello, co-founder and CEO of Wefunder.

Then you have a proliferation of marketplace lenders, such as San Francisco-based ApplePie Capital, which allows accredited investors to finance entrepreneurs taking advantage of franchise opportunities with 7-Eleven, Wendy’s and others.

“This previously inaccessible asset class features loans to small businesses supported by proven franchise brands with performance history across dozens or even hundreds of units,” ApplePie Capital tells prospective investors. “Our marketplace enables franchise businesses to access capital more efficiently, and unlocks this diverse asset class for qualified investors to fuel economic growth and jobs in local communities.”

In another effort to expand startup investing, OE Capital Partners in Dallas sees an opportunity to connect investors and entrepreneurs shut out from the traditional venture capital arena.

OE Capital, founded by Patrick Howard, targets investors seeking to invest as little as $50,000 in startups, the Dallas Business Journal reported this month.

OE Capital has doubled the size of its fund in its first year to more than $9 million and expects the fund to double again over the next six months.

“There’s room we’ve made for a neglected group of people, of investors who have been left behind,” Howard told the Dallas newspaper.

Source: San Francisco Business Times, Mark Calvey
Photo: Matthew Le Merle sees Keiretsu Capital’s angel-investment funds as an avenue for more wealthy investors to back startups. (SPENCER_BROWN)