Nin Desai: Crowdfunding Venture Capital Through Multiple Investment Options

Ms. Nin Desai is the President and CEO, of NIN Ventures (or NIN.VC) – a crowdfunded technology venture capital firm based out of Chicago. She has been awarded 2015 CEO Of The Year – Illinois, for innovation and contribution to the Venture Capital & Private Equity industry by Acquisition International magazine and Private Equity Fund Manager to Watch for 2017 by Corporate America. NIN.VC has been the recipient of several awards including Wealth and Finance International Magazine's "Best Technology Venture Capital Fund - Illinois" for the Alternative Investment Awards, the "Best Crowdfunded Technology Venture Capital Fund - US" for the Fund Awards, and “Leaders in Private Equity – Illinois” by Corporate Vision magazine to name a few. NIN.VC has also been featured in Chicago Sun Times, Chicago Tribune, Forbes, Inc., WGN's After Hours with Rick Kogan, NBC Weekend Web with Charlie Wojciechowski, Bloomberg's Taking Stock, and Equities, to name a few. 

NIN.VC invests in Series A and B rounds of 3D printing, the 4th industrial revolution, cloud computing, virtual reality, financial services, education software, and other disruptive technology companies. Venture Capital until now was the domain of the super-wealthy and institutions, but NIN.VC is a unique and first of its kind crowdfunded technology venture capital fund for accredited investors who can invest in the NIN Ventures Technology (QP) Fund with a minimum amount of $100,000 using multiple investment options like self-directed IRAs, Defined benefit plan, or a regular checking/savings account. 

The 2008 Financial Meltdown led to a liquidity crisis for entrepreneurs, companies, LPs, & VCs. Fewer IPOs in the market mean no exits for VCs, no returns for LPs, and as a result venture funds were on a decline. No new funds mean less startup funding, low employment, and slow economic growth. Thus, on April 5, 2012, President Obama signed, The Jumpstart Our Business Startups Act (the JOBS Act), which enables crowdfunding for “accredited” Americans. An accredited investor is an individual with an income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income OR have a net worth exceeding $1 million, either individually or jointly with his or her spouse, excluding the primary residence, qualifies as an accredited investor. For an Entity, any trust, with total assets in excess of $5 million qualifies. 

Crowdfunding is a practice of funding a project or venture by raising contributions from a large number of people, typically via the Internet. Since 2014, the Crowdfunding industry has grown from $16 billion to $34 billion in 2015 and is doubling or more every year. According to the World Bank estimates, Crowdfunding was supposed to have a market share of $96 billion by 2025 – 1.8 times today’s venture capital industry. However, over the years Crowdfunding has been gaining momentum breaking prior estimates to have a market share of approximately $70 billion in 2018 and is expected to reach $114 billion by 2022.

The market is flooded with various types of crowdfunding options like donation, reward, lending, equity, royalty, and even hybrid versions. The two most popular types of crowdfunding methods are reward and equity. For rewards-based crowdfunding, entrepreneurs pre-sell a product or service to launch a business, and sometimes even in return for gifts or thank you notes. For equity crowdfunding, the backer receives a share of a company, usually in exchange of the money pledged. In the case of NIN.VC, it would be limited partner interest in the NIN Ventures Technology (QP) Fund.

While the Obama Administration achieved success with the JOBS Act by creating jobs for the Economy, it also did a disservice to the people of the United States by encouraging crowdfunding in companies directly, which exposed them to a high degree of risk with such an asset class. With the traditional venture capital investment process, we were all indirectly invested in a venture capital fund via a pension fund or institution. Those pension funds and institutions had a diversified portfolio, on top of that, they were investing in the venture funds and not companies.

Most people are familiar and have a three-dimensional portfolio (i.e. stocks, bonds, and mutual funds), but if you look at Harvard and Yale’s portfolio, they take a long-term approach and invest in alternatives like venture capital. E.g. Yale is currently the best performing endowment fund in the United States and its venture investment returns exceed all other asset classes. Since 2008 to 2018, Yale has increased its asset allocation in Private Equity / Venture Capital from 20.2% to 33.1%, out of which 19% is venture capital, compared to 13.7% in 2014 and just 10% in 2013. Yale’s target venture capital allocation for 2018 was 18.0%, which exceeded the 5.5% actual allocation of the average educational institution. Yale’s venture capital portfolio is expected to generate real returns of 16.0% with a risk of 37.8%. Over the past twenty years, its venture capital program has earned an outstanding 165.9% per annum. 

*As of June 2018

Source: Yale Reports

The top three criteria any investor should look for in a venture fund is team, experience, and honesty/transparency. As far as returns are concerned, Technology focused funds generally tend to outperform USVC (United States Venture Capital) Index. Historically, the USVC Index tends to outperform both USPE (United States Private Equity) Index and the S&P 500. Also, unlike popular belief generally First-time funds tend to outperform Non-First-Time funds and All Venture Capital funds.

Recently, the SEC approved Title III JOBS Act, Equity Crowdfunding for non-accredited investors, which allows any U.S. citizen, regardless of income, to make direct investments via a Crowdfunding portal. However, investment in a fund like ours is still limited to accredited investors. Given funds are a less riskier asset class compared to crowdfunding in companies, perhaps it’s time to revisit their investor eligibility, alter the definition of an accredited investor, truly democratize venture capital and make crowdfunding available for everyone. Given the long-term (5-10 years) venture capital investment cycle, we will probably not see the negative effects of crowdfunding for a few more years. However, in the meantime are American people given the wrong kind of freedom when it comes to their investment decisions?