Once upon a time, to start a successful venture capital (VC) fund, you “had” to have access to great deals, a suite of services you could offer to startups in order to help them grow faster, or a successful track record in starting or operating startups. Without these abilities, limited partners (LPs), or partners with limited liability, wouldn’t trust you in selecting the best companies out there.
But today there is a growing new market called the “online private market,” where hundreds of startups raise capital every month on platforms like Republic, Wefunder, StartEngine, and more than 50 other platforms. In this new market, access to deals is not a special advantage anymore — anyone can invest in these companies. Most public investors are existing or potential customers of the companies they invest in. In that way, they become ambassadors to those companies and provide services no individual VC firm can offer. And with dozens of new startups raising capital online every week, a traditional VC team can’t possibly go through each and every company to find the hidden gems that could become unicorns in the future.
Online startup investing regulations have forced startups that want to raise money from retail investors to disclose much more information to potential investors than they used to. If you look at any public raise page on an equity crowdfunding platform, you will find details on a company’s performance, growth, financials, product, future plans, and much more.
With this abundance of data, the only way to select winning companies is to become a data-driven investor. The data-driven approach to investing selects startups based on evidence more than intuition, which in turn gives investors the potential to achieve higher returns with lower risks.
But being a data-driven investor is easier said than done. Startups raising capital online publish tons of unstructured data. There are also multiple data sources investors should consider to make informed investment decisions.
This is where KingsCrowd Capital comes in. We’re a team of founders, venture capitalists, crowd investors, data scientists, engineers, and financial researchers. And we all believe in the potential of the online private market. Over the past four years, we’ve seen the number of Regulation Crowdfunding (Reg CF) and Regulation A (Reg A) raises alone grow from an average of 100 active raises a month to 700. The total amount of capital successfully raised every month grew from $5 million to $100 million a month. And the total market cap for Reg CF and Reg A grew from less than $1 billion to more than $30 billion. (For more details on these stats, please visit our Market Analytics page.)
Since 2018, KingsCrowd has collected data on every startup raising capital on any equity crowdfunding platform. We’ve also created proprietary data algorithms to compare these companies to each other and rate them based on six main categories: Price, Team, Market, Differentiation, Performance, and Risk. Today we collect around 500 data points from various data sources on every company we rate.
To test the performance of our ratings, we continuously track the performance and valuations of startups as they raise subsequent funding rounds. We calculate the average valuation growth — the “unrealized returns” — across all subsequent rounds. Then we compare the market average of that data to the average unrealized returns for highly rated companies (those that received a KingsCrowd rating of four out of five or higher).
As you can see in the above chart, there’s a very wide range of unrealized returns across more than 300 subsequent funding rounds. Some startups saw unrealized returns as high as 70x, while others were as low as 0.3x. Overall, the market average for unrealized returns was 2.7x (as of the first quarter of 2022). But the average for KingsCrowd’s highly rated startups was 3.5x. That means our startup rating algorithm is outperforming the market by nearly 30%.
In addition, KingsCrowd’s highly rated startups are less likely to fail to raise a subsequent round. On average, 20% of online startup funding rounds fail to reach their minimum target funding. But only 10% of our highly rated startups failed to do so.
Higher returns and better chances of startup success — that’s the power of data-driven investing. And we’re constantly refining, updating and monitoring our rating algorithm. So it will only continue to get better.
As I said before, being a data-driven investor is not an easy approach. That’s why KingsCrowd started as a data company first, more than four years ago. Now, we have launched a data-driven fund that utilizes our ratings algorithm.
There is nothing traditional about KingsCrowd Capital’s first quant fund (a fund utilizing strategies based on numerical data and algorithms). Because we’re building a cost-efficient VC firm at scale with automated deal sourcing, we’re able to cut traditional VC fees in half! Instead of the normal 2% management fees and 20% performance fees (carried interest), KingsCrowd Capital Fund charges a 1% management fee and a 10% performance fee (carried interest).
The fund is also set to invest in a much bigger portfolio than those of traditional VC funds. Instead of investing in 20 to 30 startups, we’re investing in 100. That’s because the most recent research on early stage investing shows a clear correlation between a larger portfolio size and higher returns. And we’re targeting retail LPs more than institutional LPs, because we believe everyone should have access to venture-level returns. Unfortunately, we can only accept accredited investors based on current regulations for now, but we hope those regulations will change in the near future.
Our first fund is a generalist industry-agnostic fund. We wanted this fund to appeal to a large number of investors as a widely diversified fund investing in the top 100 startups in the online private market. We understand that some investors would like to get more exposure to specific industries. That’s why we share all of our investments at the time of investing with our LPs. This enables LPs to co-invest with us in companies from industries they’re more interested in.
After we close this fund and start deploying capital, we plan to launch industry-specific funds, an impact-focused fund, a female founders fund, and an LGBT+ founders fund.
We hope that accredited investors will join us on this journey into the future of VC as pioneers investing in the first VC quant fund for the online private markets. To learn more about KingsCrowd Capital’s first fund and to invest, please visit the fund website. On the same page, you can also book a time with me to go through any details and ask questions.
Wall Street has Morningstar, S&P, and Bloomberg
The equity crowdfunding market has KingsCrowd.
About: Ahmad Takatkah
Ahmad comes to KingsCrowd with the perfect blend of venture capital and data science experience. He holds an MBA, is a Kauffman Fellow and has spent eight years working in venture capital, with stops at N2V, Leap Ventures, and ArzanVC. He also spent three years at Carta, a leader in cap table management and private equity technology. In his free time, he runs his own VC and data science-focused blog: VCpreneur.com where he entertains and educates thousands of readers.