Markets by Grant | Private Markets Investing

10 min readJun 21, 2021

Welcome to Markets by Grant number 3: “How to Keep Your Powder Dry and When to Use It”

First things first, shoutout to my dear friends Jamal Cherry and Mikal Lewis who helped me to understand this space through their growing startup, Halo (more on that later).

Back to the matter at hand, does anyone else stay up late at night contemplating confounding business oxymorons like “why are a company’s most liquid cash reserves called dry powder? What happens if the powder gets wet? Is it a good or bad thing?”

Unable to sleep, I threw the covers off, logged on to Pitchbook, and discovered that dry powder as finance slang originated in the 1600s, referring to the military practice of keeping dry gunpowder at hand for battle readiness. Cool.

This led to another series of questions, “does this mean that deploying dry powder = shooting a cannon at someone? Why so violent, bro? In a VC context, does this mean that investments are adversarial affairs where the startup, left with a gaping hole in its hull and taking on water, is forced to be boarded, pillaged, and steered by the investor? Man, that’s a jaded POV. I should sleep, I’m pretty sure tomorrow is Monday.”

The fact of this matter is that most people, not just VCs, have some amount of dry powder at hand (albeit to very varying degrees). Few people, however, have access to the same private market investing opportunities as VCs.

Hence, this topic of interest: Platforms for Democratized Private Markets Investing (admittedly, a mouthful).

The Market (And Regulatory Environment)

Can any individual invest any amount of money in a private business? Kind of.

Some types of investments require individuals to be accredited investors (an SEC legal designation). This essentially means individuals with net assets worth over $1M or annual income of over $200K (although the definition is much more complex, and there are loopholes). Long story short, that’s not the profile of your average American. Everybody who doesn’t hit that bar is a non-accredited investor (more on this distinction later).

The SEC also regulates the process by which individuals (accredited and non) can invest in private market opportunities, using Regulations CF and A+. These regulations govern the market for democratized private markets investing — which is large and fast-growing.

The Regulatory Past and Future

Let us now take a journey through time:

2015 — Reg CF and Reg A+ are meaningfully updated and adopted.

The SEC developed these regulations in response to complaints that institutional capital was increasingly difficult to secure in private markets. The regulations effectively opened up private market investing to everyday people (both accredited and non-accredited).
Investing through Reg CF and A+ exploded, and platforms rapidly populated the space to capitalize on the nascent opportunity.

2021 — Reg CF and Reg A+ are significantly expanded.

The Reg CF funding ceiling increased from ~$1M to $5M, and SPVs are now allowed.
The Reg A+ funding ceiling increased from $50M to $75M.
The definition of accredited investor was expanded.

Market Size and Growth

Like I said, it’s large and fast-growing. Take a look at this handsome chart I made:

Lucky for us, the SEC tracks and reports on the actual market size:

$214.9M was raised through Reg CF in 2020 — a 105% increase since 2019.
$1,042M was raised through Reg A+ in 2019 — a 41.5% increase since 2018.

The Bottom Line

By now, you can probably surmise that this market is no secret. It’s already quite crowded, but it certainly hasn’t settled.

Given the recent, significant increase in regulatory ceilings — coupled with strong historical trends — platforms are anticipating a very high degree of organic growth. Others are preparing to grow through acquisition to vie for winner in a market that has traditionally been dominated by few.

Before diving into the competitive dynamics, let’s take a look at the value propositions for both sides of these platforms.

The Platform

A brief definition: by platforms for democratized private markets investing, I’m talking about online marketplaces with individual investors on one side, and private market deals on the other side. Through the platform, deals are diligenced, investments are facilitated, and exits are managed.

I worked with two founders in this space (Jamal and Mikal) to break out the value propositions of these platforms. Ie:

As an investor, what should make me want to use this platform as opposed to traditional investment options (ie: stocks, bonds, etc)?
As a founder/deal originator (the person who posts the deals), what should make me want to use this platform as opposed to traditional investors (ie: VCs, Angels, Banks, etc)?

We tied these value propositions to specific features we’ve seen offered in these platforms. Take a look at this resulting graphic (your eyes may need time to adjust):

In summary, these platforms will prove valuable to Founders/Originators insofar as they enable them to…

Get better terms — (less dilution, less interest, etc)
Get capital faster/easier — (less effort to put money in my pocket)
Access helpful people — (for relevant advice, customers, connections)

And they will prove valuable to Individual Investors insofar as they enable them to…

Get wealthier — (make money in ways I couldn’t before)
Get smarter — (learn about new markets/business models from smart people)
Pay it forward — (help out founders/investors as a contributor to a community)

Let’s keep these things in mind as we dive into the competitive landscape.

The Landscape

A few disclaimers before diving in:

You’ll note that I’m dodging the NFT stuff entirely. There’s a lot to unpack there, and that’s for another Markets by Grant.
This market map is illustrative, not exhaustive. It’s as of a few weeks ago, and may soon be out of date for such a fast-moving market.
Side effects may include headache and drowsiness.
Do not consume this market map if you are pregnant or operating heavy machinery.

…And a brief orientation on how I’ve set this up.

The X-Axis refers to breadth on the supply side of these platforms. The further right you go, the more types of investments you can make, in more markets. For example, at the far right, you can participate in asset-backed investments, equity investments in biotech startups, SaaS revenue financing, and more, all from the same platform. At the far left, you might be able to make equity investments of $10-$20K in seed stage, SF-based biotech startups.
The Y-Axis refers to the selectivity of the demand side of these platforms. Any of-age American can participate in platforms at the bottom of the map. These are our “Everyday Evans”. To participate in platforms at the top of the map, you must be an accredited investor who has a special institutional affiliation (ie: Ex-Harvard, Ex-Uber, etc). These are our “Elite Eleanors”.
Thus, at the top right, we have platforms which are selective in terms of investors, but provide a broad diversity of investment categories. At the bottom left, we have a narrow set of investment categories accessible to anyone and everyone.

Without further ado, here she is:

In the middle, you’ll see the big box full of recognizable incumbents. These platforms are your classic “Startup Equity” model, where individuals can browse and choose to participate in equity rounds for early-stage startups. On the right and left, you’ll see a sneak preview of what I see as promising white spaces in this market.

Keep these in mind as I dive into my perspectives on challenges and opportunities…

Challenges of the Startup Equity Model

These platforms are responding to a large, growing market opportunity through Reg CF and Reg A+. However, their undifferentiated models leave significant value on the table.

Note: For a real challenge, try reading through my entire deep dive of criticisms while holding your breath.

VC-style returns don’t work for unsophisticated, capital-constrained investors. Returns are binary, the probability of returns are low, and the exit timeframes and feedback loops are very long — so an investor would have to be highly diversified or uncommonly lucky to have a hope of a return which would rival her public markets investments.
Platforms developed fund offerings as a response to this criticism — but these offerings are likely to underperform (if platforms make an IRR commitment, it is 10–11%) — and may end up being largely correlated with public market performance, which erodes their relative value as a diversifier.
These platforms also risk being relegated to bottom-of-the-barrel deal flow. If a founder/originator is using the platform because they can’t access institutional capital, then institutional bias aside, they’re likely to be a riskier investment. Meanwhile, institutional capital is moving downmarket to get in on the action, and is actively plucking out the juicier deals.
If a founder/originator provides a strong enough value prop for institutional capital, they’ll want something significant in return from one of these platforms — either terms, expediency, or connections. Regs CF and A+ require in labor-intensive SEC disclosures, which raises the bar for value provided in return. To combat deal quality concerns, many platforms vet these deals with the selectivity of a VC, set the deal terms, and syndicate the deal out to hundreds of unsophisticated investors — thereby eroding each of these value propositions for founders/originators.
This, in turn, ironically erodes the quality of deal available. For the platform, it’s a case of ‘damned if you do, damned if you don’t.

Ok, now breathe and pause, and let’s close out my tirade by comparing this model versus the key value propositions identified above:

Takeaway: It don’t look great.

Opportunities!

Lastly, it’s time to dive into those handsome green boxes from the market maps; two strategies I believe business should skate toward to be long-term effective in this market.

Conceptually, it’s a tried-and-true marketplace strategy: be narrow on one side and broad on the other.

Strategy 1: Verticalized Investing Platforms

I will be the first to acknowledge that we are all tired of reading the word “verticalized”, but I’ve got to do it one more time.

Verticalized investing platforms build traffic around a narrower set of investment categories.

These platforms create communities of people passionate about a subject matter area, who may, at times be investors, founders/originators, and customers.
Unified focus drives transaction volume, stickiness, and investor sophistication, which in turn makes the investor base on these platforms more valuable to founders/originators as advisors or customers.

From a value proposition standpoint, this model looks favorable:

Examples: There are already a number of strong players in this space (listed in the market map). Pipe, and other SaaS revenue stream funding platforms, are interesting twists on this model. For these models, repeatable transactions at various scales present consistent financial arbitrage, predictable/safe private market returns, industry education, and an active community of investors.

Strategy 2: Selective Community Investing Platforms

Selective community platforms bring a curated group of investors together who can provide financial and social capital to founders/originators and each other. Investors are admitted based on a shared credential (school attendance, ex-CEO, notable academic, etc). Together, they contribute to thought leadership, deal sourcing, due diligence, and portfolio support.
Purpose-built communities have the strongest social ties (and therefore norms) driving high levels of activity, retention, and are the closest to competing with institutional capital in terms of social capital.

From a value proposition standpoint, this model also looks favorable:

Examples: These platforms are less visible, and typically on an “If you know, you know” basis — but rest assured, they exist. Many of these platforms operate as email chains, Facebook groups, Whatsapp threads, supper clubs, etc — but they’re starting to be formalized.

For investors, a purposefully curated community provides more diverse and high-potential investments, more meaningful learning opportunities, and a real incentive to pay it forward. For those looking to pay it forward — the platform is more engaging and accessible than traditional impact investing/donation pathways. Founders/originators are rewarded with very ‘smart’ money.

Jamal and Mikal are working on this formalization with Halo, where Harvard-affiliated founders/originators post (or source) private market deals — spanning VC equity, search fund, asset-backed, etc. Accredited and experienced Harvard-affiliates invest and partner as advisors/connections, and the platform curates investment thought leadership and events for all members. I’d love to see more of these models being formalized and expanded.

Looking Forward

Is VC being disrupted? I rolled my eyes as I was typing that, but it probably had to be asked. Still, I’m not going to fall for the blanket statement response to the giant question. Instead, I’ll say that I see these democratized forms of investing starting to take on more structure and credibility, while retaining their flexibility.

I haven’t landed on a fun name for the future of this space. VC v2, SPV2, and next-gen next-gen are under consideration. DM me with suggestions.

Thanks as always for sticking with me. If you made it this far, please feel free to roast me like a Thanksgiving turkey in the comments section.

-G