Backstage Capital Founder Arlan Hamilton Eyes One other Milestone: First to Crowdfund $5 Million
As one of the first funds to give priority to underrepresented founders, Backstage Capital has long been hailed as an innovator. Now its founder, Arlan Hamilton, is raising money for another first: the first company to hit the new crowdfunding limit of $ 5 million set on Monday.
March 15 marks an important milestone in the Jumpstart Our Business Startups (JOBS) law, which then-President Barack Obama authorized to make it easier for small businesses to raise money. The rule change, announced on November 20 by the US Securities and Exchange Commission, puts a limit of $ 5 million on crowdfunding campaigns, compared to the previous limit of $ 1.07 million.
The rule change is critical for Hamilton’s investment firm and marks another big step forward for crowdfunding investors and the startups they support. In particular, the new crowdfunding limits should be of great help to startups that rely on their communities to to fund them early, rather than for a wealthy family member or angel investor. Crowdfunding also makes it easier for entrepreneurs to stay in control of their businesses.
Rather than investing directly in a fund operated by Backstage, the company uses crowdfunding to fuel its parent company Backstage Capital, which manages Backstage’s investments and accelerator. In return, investors receive a share of the profit and of the management fees generated by Backstage.
“This just seemed like a much cooler, better, and more collaborative way of doing things,” says Hamilton. “Nobody is going to make a million dollars out of it, but if we win, the crowd will win.”
By February 1, 2021, Backstage had raised $ 1.07 million through crowdfunding, which was the most allowed by the SEC at the time. Hamilton is hoping to hit the new $ 5 million cap quickly as the February round sold out within hours. Investors who had hit the previous cap were offered a waiting list so they could invest if Hamilton decided to raise more. On March 15 at 3 p.m. EST, Backstage had raised approximately $ 2.3 million from 3,237 investors.
“There is no better example of retail investor power,” said Ken Nguyen, co-founder and CEO of Republic, Hamilton’s chosen crowdfunding platform. “Venture capital is the most elite form of business, and it has raised the old maximum of $ 1.07 million in hours.”
While raising funds for a venture company’s operating company likely doesn’t make sense for larger funds, it could open a new way forward for smaller early stage funds. Backstage has raised several million dollars over several years, according to Hamilton, with a nontraditional structure of management fees. But venture firms don’t get their management fees until the money is invested, and that takes time. “We’ve never had enough assets under management where an administration fee would cover even one person,” says Hamilton, noting that she had spent many sleepless nights wondering how she was going to do the payroll. There are six people at Backstage. “We struggled with fundraising, but we also invested in 175 companies. We’re hacking our way through.”
There are other traditions in the venture world that make it even more difficult for new managers who are not independently rich. So-called limited partners – the people and institutions who invest in venture funds themselves – expect fund managers to invest their own money. Typically, the manager must also present at least 1 percent of the fund’s value.
Some managers borrow the money, often from Silicon Valley Bank, a commercial bank known for its focus on entrepreneurs and their investors. Other companies like Harlem Capital have set up a separate cash pool specifically for operating costs. Some funds sell parts of their management company and usually “not for a good price,” says Hamilton. “It happened to me and I was very public about it.” To get backstage by 2020, Hamilton had to contribute money out of pocket.
The fact that first-time venture capitalists have traditionally had to travel extensively to raise a fund and then face a long wait for their first investments to bring returns limits the number of people who can even afford to try to raise a fund . “The system doesn’t work for aspiring solo managers,” says Hamilton. “What we’ve done could very well be a blueprint so these founders don’t have to make sacrifices as they have before. I would like to see more of the smaller funds not have to worry like we had to.”