Attract Investors to Your Direct Investing Platform - A Guide

The Challenge of Connecting Investors with Opportunities

Numerous fintech companies have attempted to function as intermediaries, bridging the gap between investors and potential investment ventures. However, a significant hurdle inherent in establishing a successful two-sided market lies in attracting investors to participate. Securing the interest of individual retail investors presents a challenge in itself, but engaging family offices and other substantial investors proves even more difficult.

Growing Interest in Direct Investment

Recently, I’ve observed a rising trend of family offices expressing a preference for direct investment in companies, rather than utilizing traditional fund structures. This shift has prompted an examination of online platforms facilitating such direct investment opportunities, specifically those concentrating on:

• Direct investment in early-stage companies: Platforms like AngelList, AngelSquare, ClearList, iAngels, FundersClub, Future Africa, Gust, Interprivate, iSTOX, LetsVenture, Manhattan Street Capital, MicroVentures, Nasdaq Private Markets, OurCrowd, Proteus, Republic*, Sharenett, SeedInvest, Seedrs, Zanbato and Trident are gaining traction.
• Secondary market transactions for tech company shares: CartaX, Equityzen, and Sharespost/Forge provide avenues for these transactions.
• Real estate investments: AcreTrader, AlphaFlow, Brickvest, Crowdstreet, Fundrise, PeerRealty, RealCrowd, RealtyMogul, Republic Real Estate*, and SmallChange are key players.
• Cryptocurrency investments: Bisq, Binance, Bitcoin IRA, BlockFi, Cash App, Coinbase, eToro, FalconX, Gemini, and Republic* offer access to digital assets.
• Art and collectible investments: Otis, Rally, Masterworks, Vinovest, and Yieldstreet cater to this niche market.
• Debt investments: Percent, Clade, Republic*, and YieldStreet provide debt-based investment options.

Institutional Platforms and Technological Advancements

Tim Friedman, founder of PE Stack, highlights the strong demand for direct access to alternative investments. He notes the emergence of platforms like Delio, which offer the technology necessary for institutions with existing buy- and sell-side relationships to rapidly deploy sophisticated private investment platforms. For example, Delio developed an ESG-focused direct private investment platform for Barclays’ wealth management division.

It’s important to note that this analysis deliberately excludes firms focused on providing access to investment funds, such as CAIS, Context365, iCapital Network, OurCrowd, Palico, PrimeAlpha and Trusted Insight. These services involve investors delegating investment decisions to general partners.

Essential Features of Direct Investment Platforms

The fundamental requirement for these platforms is to effectively address the “jobs to be done” – the core needs that differentiate them from traditional fund investments:

• Investor Control: These platforms empower investors to actively participate in investment choices, rather than relying solely on fund manager discretion.
• Administrative Support: This includes essential services like 409A valuations.
• User Convenience: Features like mobile accessibility enhance the investor experience.
• Investment Consistency: A standardized presentation of investment opportunities simplifies evaluation.
• Investment Transparency: Investors require clear and ongoing information regarding their investments.
• Educational Resources: Providing learning opportunities within the investment sector is highly valued. Eric Woo, co-founder of RevereVC, emphasizes the power of content strategy to drive traffic to deal portals.
• Competitive Fee Structures: Direct platforms typically charge carried interest on a deal-by-deal basis, requiring portfolio outperformance to justify the investment compared to a fund.
• Credible Deal Leaders: Investors rely heavily on the expertise of the individuals leading investment deals, who are incentivized by per-deal carry to take calculated risks.
• Social Proof: Observing participation from respected peers can bolster investor confidence.
• Regulatory Compliance: Navigating the complex and evolving legal landscape is crucial. Cheryl Campos, head of venture growth and partnerships at Republic, highlights their commitment to legal innovation with a dedicated team of attorneys.
• Traditional Alternative Investment Benefits: Maintaining the advantages of alternatives, such as low correlation and illiquidity premiums, remains essential.

Challenges and Perspectives on Platform Success

Successfully implementing these features is a complex undertaking. Ryan Caldbeck, founder of CircleUp, offered a critical assessment, stating that “equity crowdfunding or equity investment marketplaces failed.” However, the professionals involved with the platforms listed would likely contest this viewpoint.

The Value of Shared Participation

An optimal scenario involves individuals participating on both sides of the investment process. Robert Blecher, co-founder of AltsforAll, points to examples like AngelMD and Propel(x), where networks of healthcare/biotech experts both seek and provide funding. Similarly, SMB investment sites like Honeycomb Credit, The SMBX, and Worthy Bonds see business owners investing in each other, and platforms like Prosper or Sofi often have users who both lend and borrow.

Diverse Strategies for Attracting Investors

Several key strategies, or 'levers', can be employed by platforms aiming to broaden their investor base. These approaches focus on enhancing engagement and building trust within the investment community.

The ability to have direct interaction with deal sponsors represents a significant advantage, as many crowdfunding platforms currently lack this feature. Platforms like CrowdStreet and RealCrowd, however, already facilitate such direct communication.

Originators can benefit from utilizing tools such as Carta, Long-Term Stock Exchange, AngelList, and AlphaFlow. These platforms embody the principle of community building – users are drawn in by the tools and remain for the network they provide.

Cultivating a strong sense of community is paramount. Brent Beshore, CEO of Permanent Equity, noted on Twitter that private, interest-specific social networks are gaining prominence, offering a significantly higher signal-to-noise ratio compared to broader platforms like Twitter and LinkedIn.

Investors highly value opportunities to learn from and engage with discerning, unbiased investors who are evaluating the same potential investments. Arno Niazi, CEO of GoingVC, highlighted their venture capital learning and development program, supported by an active Slack community and a venture scout program, as an example.

Cheryl Campos of Republic emphasized their commitment to investor education through events like Angel Investing 101 and specialized modules on gaming and real estate. They also maintain a community of over 100 venture partners and facilitate engagement through private events and a dedicated Slack channel.

Several community models offer valuable insights, including: Albourne Village, Goldfingr, Value Investors Club, Republic*, SumZero, and Nexchange, which focus on investors. Others, like Credit Suisse Young Investors Program, Family Office Exchange, Tiger21 and YPO, cater specifically to UHNWs and family offices. Social communities such as ASmallWorld also provide relevant examples.

Additional strategies to attract investors and boost participation include:

• Paying interest on uninvested funds: Solutions from firms like MaxMyInterest can enable this functionality.
• Establishing clear network access criteria: Publicly defining participation requirements and levels ensures a perceived exclusivity and prevents the network from appearing open to all.
• Automated matching based on investor needs, especially risk tolerance: Tools like Stratifi* can assist wealth managers in customizing risk exposure for retail clients.
• Providing continuous information rights: Familiarity breeds comfort; keeping investors informed about a company’s progress increases their likelihood of future investment. Marco Cesare Solinas of Blue Future Partners advocates for tracking platforms allowing gradual investment through ongoing monitoring.
• Creating a sense of scarcity: Republic.co* utilizes countdown timers to emphasize limited-time investment opportunities, appealing to the desire for exclusive access.
• Offering transparent due diligence reports from reputable sources: ARC Angels Fund exemplifies this, with LPs owning the GP and earning carry by contributing to the investment process through deal sourcing and due diligence.
• Aligning platform and investor interests: The classic merchant bank model demonstrates the power of shared incentives, even with a small platform commitment to co-invest.
• Leveraging the platform network for portfolio company benefit: Ourcrowd actively utilizes its investor network to generate leads for its portfolio companies.
• Generating income for platform members: The Goldman Sachs’ Special Situations Group Chambers Street Executive Network serves as a model, providing access to senior executives for portfolio companies.
• Maintaining a robust technology infrastructure: Investing in technology can improve investment decision-making, as demonstrated by tech investors who utilize their own products.
• Fee netting: Allowing LPs to benefit from traditional fund fee structures while retaining the flexibility of direct investing, though this presents mathematical and logistical challenges.
• Financial X-Rays: Tiger21’s model demonstrates the value of peer-to-peer financial transparency and feedback.
• Careful curation and filtering: Reducing noise and highlighting quality investment opportunities is highly valuable.
• Targeted event sharing: Enabling members to share information about relevant local events fosters networking and engagement.
• Appealing to values, novelty, or passion: Platforms in the art and collectibles space demonstrate the power of these motivators.
• Providing candid vendor reviews: A platform for honest assessments of related service providers, such as private banks and recruiters, can be highly beneficial.

Gil Silberman, co-founder of Forge, observes that few companies currently offer a comprehensive suite of these services. The private investing industry is still evolving, with platforms often specializing in narrow solutions.

He anticipates a future of integration and consolidation, where data analytics, discovery tools, settlement processes, compliance solutions, fund management systems, and trading platforms converge, ultimately leading to more comprehensive service offerings from larger industry players.

Additional Resources

For those seeking further information, a variety of resources are available. These platforms offer data and insights into the evolving landscape of online investment.

Key Platforms and Associations

Several organizations are dedicated to providing information and support within the alternative investment space. These include databases, rating agencies, and industry associations.

• Alts for All: This resource functions as a comprehensive database of alternative investment platforms.
• KingsCrowd: KingsCrowd provides ratings and detailed analytics specifically focused on online private markets.
• Association of Online Investment Platforms: This association serves as a central hub for the industry, representing various online investment platforms.

Utilizing these resources can empower investors to make more informed decisions and navigate the complexities of alternative investments. They offer valuable tools for research and due diligence.

Accessing these platforms allows for a deeper understanding of the opportunities and risks associated with online private markets. Staying informed is crucial in this dynamic sector.

Expanding Your Knowledge Base

• A 15-step guide to securing funding for a new venture capital or private equity fund.
• An analysis of potential disruptors in the investment management landscape and their methods.
• Exploring the evolving dynamics of investment, including diversification strategies and increased accessibility to assets.
• Five key reasons behind the growing trend of family offices pursuing direct investments.
• An examination of private-company exchanges and pre-IPO employee stock sales.

* Please note: I hold investments in both Republic and Stratifi through HOF Capital, where I previously served as a managing partner. Additionally, Blue Future Partners is part of the advisory board at ff Venture Capital, with my prior role being a partner.