Pooled Investment Vehicle or New Tech Startup Up? A new Fund Manager can be a faster path to get your seed round
Stepping into a crowd of people who are unfamiliar with you can be uncomfortable. Introducing yourself to someone you never met can create anxiety. Speaking in front of crowds can be intimidating. Sometimes it helps to be the person a crowd has been waiting for. Let’s analyze a different position. This position sometimes achieves better results for getting money faster than the conventional CEO.
What about being a Fund Manager instead of a CEO?
Pooled Investment Vehicle
A Pooled Investment Vehicle is a mechanism designed to pool money together to invest in opportunities for mutual interest. Pooled Investment Vehicles typically exclude themselves from the definition of investment company under the Investment Company Act of 1940 by section 3(c)(1) or 3(c)(7) of that Act. Under this provision these Pooled Investment Vehicles classify themselves as a Private Fund.
The term private fund generally includes funds commonly known as hedge funds and private equity funds.
Advantages of Pooled Investment Vehicle
These entities have many benefits including perception that they will take advantage of some new technology. The perception as a Fund Manager is sometimes better than a startup CEO. A company launched only 5 months ago is different than a fund with a 5 month return history. Generally you can start with as little as $10,000, generate a return for about 5 months, and then raise additional capital to take advantage of like opportunities. If you start off with measurable income as your target, raising money can happen exponentially faster. These opportunities can include your tech startup if it is structured properly. You have to disclose your opportunity and form the Private Fund to accommodate the investment strategy.
Design your Private Fund to be a feeder fund. The feeder fund can fund your startup. Just remember you must operate the company in stages. Your first stage must be to develop application for sales not market share. Income is the most important factor not perceived value in a few years.
Investors who have low thresholds (say $10,000 per unit) and are Accredited Investors will invest into return based scenarios. A fund is about what you have done lately versus what you did three years ago.
The unique advantage of the “last six months” can sometimes make a Pooled Investment Vehicle a better option than a new company.
A six month old company is generally viewed negatively. A Pooled Investment Vehicle with six month returns is generally viewed positively.
Conflicts you must Address
There are several conflicts of interest you will have to address. One you should never be the investment adviser. There are numerous conflicts that exist. As a fiduciary the standard for custodianship is too high. The amount of money you make will be subject to much scrutiny.
Becoming the Fund Manager who invested the seed balance is perfectly acceptable. Typically the Private Fund Adviser (can be a Registered Investment Adviser in some states but exempt in others) is the decision maker. The investment policy followed by the Private Fund Adviser is designed by the Fund Manager.
You must always put some of your own money in. Failure to do this will result in a failed fund.
Compensation disclosures are important. The biggest conflicts are summarized as: 1) How much you make, 2) How much you own, and 3) How you may benefit un-proportionately compared to others as a result of investment.
If you summarize these conflicts in a simple letter, and transparently disclose you should be fine.
History of Private Funds Exemptions
Historically, many of the investment advisers to private funds were exempt from registration with the SEC. The exemption came under the so-called “private adviser” exemption. The Dodd-Frank Act replaced the old “private adviser” exemption with narrower exemptions for advisers. Under these new exemptions Private Advisers must exclusively advise venture capital funds or be advisers solely to private funds with less than $150 million in assets under management (commonly known as AUM).
As a result of the Dodd-Frank Act, many previously unregistered advisers to private funds were required to register with the SEC or the states.
Investment advisers registered with the SEC have an obligation to comply with all of the applicable provisions of the Investment Advisers Act of 1940. The higher obligation creates transparency, trust and accountability. Having structures in places that show accountability helps hurdle many objections.
Investment advisers to private funds use Form ADV to register with the SEC and/or certain state securities authorities. Investment advisers to private funds must report on Form ADV general information about private funds that they manage, including basic organizational and operational information as well as information about the fund’s key service providers.
Investment advisers with at least $150 million in private fund assets under management use Form PF to report, on a non-public basis, information about the private funds that they manage.
The majority of advisers file Form PF annually to report general information. This information includes information such as the types of private funds advised (e.g., hedge funds or private equity), each fund’s size, leverage, liquidity and types of investors. Certain larger advisers provide more information on a more frequent basis (including more detailed information on certain larger funds).
Take Away From Pooled Investment Vehicle
The key advantage you need to see here is “time”. I have known many startup tech entrepreneurs struggling to raise money for more than six months. Had they focused their application to generate sales with as little as $10,000, that paid a return to support 1% a month (yes that’s only $100), they would be in a position after six months to ask for at least $50,000. From a $50,000 second round another three months would most likely get them double the second round investment (probably about $100,000). After one year of solid returns it is feasible to get another $250,000 — $500,000.
The approach is a bit different. The approach is unconventional. The approach sometimes works better than traditional fund raises for new tech companies. This approach will not fit every tech startup. The approach is based on companies who can internalize coding, computer engineering and design to founders. Development costs are high for outsourcing so money raised must be for direct marketing of completed products. The product developed must have short go to market. If the product is too grand in scale or cannot be released in phases then this strategy may be inappropriate.
To your knowledge success!
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com.