- Famed rags-to-riches investor Arlan Hamilton is opening the door to the exclusive world of venture capital.
- Hamilton is allowing anyone, accredited or not, to realize potential gains from Backstage Capital’s portfolio.
- We want the community to have a piece of the pie, and share carry returns and management fees, Hamilton tells insider.
- Visit Business Insider’s homepage for more stories.
Famed rags-to-riches investor Arlan Hamilton is anything but traditional. As one of the few queer black women in venture capital, Hamilton founded her firm Backstage Capital in 2015. Since then, the firm has raised more than $13.5 million and invested in about 170 startups.
Now, Hamilton is opening the door to the exclusive world of venture capital by allowing anyone, accredited investor or not, to realize potential gains from Backstage Capital’s portfolio of startup investments. Regular folks with at least $100 will be able to experience the same type of returns that VCs make, Hamilton tells Insider exclusively.
“We’ve opened up our management company basically,” said Hamilton. To be clear, investors will not be investors in any of Backstage’s portfolio companies, but rather in the management entity, Backstage Capital. “This would make us one of the first funds to allow our community to have a piece of the pie, and share our carry returns and management fees, as long as they are shareholders.”
This is a big deal because the incentive for most big VCs to generate massive returns for a firm is a percent of the gains in the fund. VCs typically follow a fee structure that’s described as “2 & 20,” meaning a 2% management fee on committed capital and a 20% profit-sharing split as carried interest. In other words, the carry is how the majority of VCs make the big bucks.
Instead of following the traditional fee structure, Hamilton is using a type of investment mechanism called equity crowdfunding, or Reg CF. While this method of raising capital has been around for a few years, it has been mostly used by business owners as an alternative to costly bank loans or venture capital funding.
Hamilton says investors will receive returns if and when Backstage partners like herself receive carry and management fees, paid out in dividends, during years where a threshold is met.
As one of the first VCs to raise a round of funding via crowdfunding in this way, Hamilton believes this is just the beginning of a new era of investing where for the first time, anyone can share in her firm’s upside instead of just the general partners and limited partners.
In 2020, the SEC raised the amount companies can raise annually from equity crowdfunding from $1.07 million to $5 million. Any investor can now participate, whereas previously, you had to be an accredited investor, meaning someone with a net worth of more than $1 million or an income greater than $200,00 per year for two years.
Hamilton is not setting a cap on the number of investors who can participate in her round for Backstage Capital, but says once the $5 million cap is raised, investors will be put on a waitlist. She expects this round to open up opportunities for other crowdfunding efforts in the future, and is targeting $10 million in operations runway in total.
“I came into venture as someone who has been poor my whole life,” said Hamilton, referring to the time she had to sleep on the floor of SFO because she was homeless and broke. “There won’t be instant millionaires made from Reg CF, but you’re going to participate in the upside of everything we do at Backstage, and I think that’s important, she added.
To open up the pool, Backstage is working with Republic, a private investment platform that lets anyone invest in companies before they go public. Spun out of AngelList, Republic’s regulated private investing platform features more than 800,000 members investing as little as $10 in over 140 companies.
While Backstage is currently sitting on $13.5 million in assets under management, including a $6 million fund with Mark Cuban, Hamilton is optimistic about what crowdfunding means for the future. She expects to land hundreds of millions of dollars under management over the next decade, but in typical Hamilton fashion, wants to do it on her own terms, writing her own rules instead of taking money from institutional investors.
“I’m tired of the gatekeepers,” said Hamilton. “I’ve said it since 2017, but I just love the power of the crowd,” she added.
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