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Individual Investors Getting Skin in the VC Game Through New Platforms

If Airbnb and Uber can democratize their industries, why not the VC world? That’s the thinking behind Brightspark Venture’s decision to create a new investment model that bridges the gap between venture capital investments and the Canadian individual investor.

The plan was hatched four years ago, when the VC company decided there had to be a better way to match startups with individuals keen to find more innovative investment avenues.

“What we are doing is new, because it’s a model that is actually bringing fresh, new capital to the market beyond simply recycling VC money into companies.” says Sophie Forest, co-founder and managing partner. “What makes this unique is that the money does not come from government, pension funds or banks. It’s 100 per cent purely private investors.”

More importantly, it fills a gap that has kept many willing investors out of the VC picture. “If an individual wants to invest $25,000 or $55,000 into a VC deal, they can’t because investment requirements typically start around half a million,” Forest explains.

Brightspark has a long history of VC investing. Until four years ago, it followed the traditional model of sourcing large quantities of funds from institutional investors, selecting the best startups, sitting on company boards, and advising and helping them grow in the hopes that they reach the IPO stage. “The [management side of the process] has not changed at all,” Forest says. “What we decided to do instead however was to offer deals to individuals rather than institutional investors and invite them to our network.”

One might naturally might jump to the conclusion this is simply a crowdfunding model. It’s not.

Funding opportunities are only offered to accredited investors, with a minimum of $10,000 to invest. With their investment they become limited partners. There are two ways to invest: either deal by deal (i.e. selecting a specific company) or multiple deals.

The other option is to prefund an account and choose an investment formula that will automatically diversify the funds. The latter often makes more sense because it allows investors to spread their risk, Forest notes. “If you want to invest $200,000 over two years, and want to put $20,000 in the next 10 deals, those can be automated.”

As passive partners, investors are not involved in the day to day operations of the portfolio companies. Instead, Brightspark takes on the role of management and reporting of each company’s performance. “Investors simply choose what they feel are the best deals and we manage the rest. We take on the role of managing partner, doing what classic VC funds do, sitting on boards and giving advice to management,” Forest says.

In the event of a successful exit, 15 per cent of the profits are returned back to the fund and 85 per cent distributed to the investment partners. The fund specifically focuses on tech companies that have gone beyond the early seed stage, Forest explains. “We don’t get into super early stage companies.”

For investors, it’s an opportunity to benefit from a high-growth category before the IPO stage, she says. “The VC asset class has not been available to individual investors, yet a lot of companies in tech don’t go public anymore. All those big valuations of companies like Uber and Airbnb were done privately. We think the opportunity for individual investors is huge with our model. At the same time it is bringing significant fresh capital to Canada.”

Forest reports Brightspark now has more than 250 individual investors accounting for over 500 transactions, and growing rapidly. In 2017 it raised more than $7 million, and is well on track to raise $20 million in 2018. “We’ve already done over $6 million in the first two months of this year.”

She admits that converting to this new model has been a startup exercise in itself. “It’s the same thing for us as building a company. We needed to see if there was interest and build an infrastructure. By the beginning of 2017 we had a few small deals, and then went all out to building on that. Moving forward will be our growth phase.”

Brightspark is not alone in trying to bring new options into the investment picture. Other players in Canada have entered the ecosystem with their unique twist on the investment model, such as FrontFundr, Crowdmatrix, AngelList, and OurCrowd. Forest maintains however that Brightspark has managed to carve out its own niche. “Crowdmatrix and FrontFundr for example are more [crowdfunding] platforms for raising money from individuals. The others are aggregate investors that originated from angel platforms. They tend to be earlier stage and do smaller deals. We are the only ones that originated from a VC model.”

One of the first companies to benefit from the Brightspark investment model was Hubba in Toronto, a platform that connects brands to independent retailers. “Brightspark was one of the first investors to put money into our company,” says Ben Zifkin founder and CEO. “They were a big part of our initial seed financing round of $3.1 million in 2014.”

Now Hubba is well along the funding track. It received $11 million of Series A financing in 2015 with Real Ventures, Kensington Capital Partners, and Canso Investment Counsel. In 2016 it closed a Series B round with Goldman Sachs Investment Partners for an undisclosed amount. Plans are to IPO in 2020.

“Brightspark came to us before we even had a product in the market and had six people” he says. “Now we’re a dominant player in our space, approaching 100,000 brands and retailers in 140 countries on our platform, and adding 2,000 new companies every week. Our team has grown tenfold.”

The beauty of Brightspark’s model, he says, is that they have unlocked a massive pool of capital in the general population that wouldn’t have been able to put their money into early stage companies. “That’s unbelievably beneficial for companies like ours.”

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