An AI Driven Quant Fund, Institutional Investing, and... Equity Crowdfunding?
Sherwood Neiss led the charge to legalize equity crowdfunding - now, with his new fund, he's ready for the next step
Here’s the scenario:
You’re at Harvard University. A human with robotic tendencies approaches you. You know it has no chance of being a robot with human tendencies because the year is only 2004.
It’s Mark Zuckerburg trying to get you to sign up for Facebook.
You don’t want to be just a regular user - you want to invest in Mark and his idea, but how?
Well, you can’t - at least not until their 2012 IPO when they were already a $100 billion company. In fact, you can’t invest in any private company.
What would you have done in this scenario?
There’s no shame in the answer being, nothing.
There was no exemption designed for retail investors to have a path to invest in startups. If you wanted to invest, that’s what buying public stocks or a home was for. Venture Capital? This was a rich person’s game.
In the 70+ years following the first federal law to regulate securities, the Securities Act of 1933, equity crowdfunding was illegal. Maybe no one thought it was possible to get such an entrenched law changed, but perhaps the truth is no one cared enough to be the selfless hero for the little guy. The rich and venture capitalists were surely fine with having exclusive rights to access private deals, or at least didn’t have enough incentives to try and do something about it with no obvious gain to them.
That is, until Sherwood Neiss (who goes by Woodie) and 2 peers worked to change the law. They more literally than figuratively wrote the book on equity crowdfunding - their framework, after going through the house/senate and SEC, became law. It didn’t just barely pass. It achieved broad bi-bartisan support after a self funded $54k lobbying campaign… in an election year, nonetheless.
Multiple successful ventures since, including getting hired by the World Bank to tour 43 countries to advance equity crowdfunding internationally, Woodie Neiss felt 11 years later the time was right to launch D3VC.ai - and the implications for equity crowdfunding investing are substantial.
Startup Funding in a More Restrictive Environment
2022 was a difficult year for venture capital and many of their portfolio companies. While there are shoots of optimism this could be turning around, there is no doubt the economy is in a more restrictive state than it was even only a couple years ago - higher interest rates, lower valuations, an increased focus on profitability as opposed to revenue growth at all costs, etc.
“People we’re talking to see VC’s are tightening their belts”. - Woodie
Woodie noticed a shift with venture where it moved upstream, providing a gap at the early stages of funding. In this gap, he saw opportunity for new funds with an early stage focus.
Here came the inspiration for D3VC.ai, an “Asset Manager Transforming Early-Stage Venture Capital Investing. Utilizing AI and Data Science to Identify Targets. Led by an Experienced Team of Financial and Machine Learning Experts from Leading Institutions and Startups in the Country,” per the D3VC.ai website.
This wasn’t the first time I’ve heard the sentiment that equity crowdfunding will continue to benefit as VC’s pull back. After all, if it’s harder to get funding through a VC or a bank, equity crowdfunding automatically becomes a more viable alternative for companies that might not have considered it before. However, how D3VC.ai plans to capitalize on this dynamic was unique to me.
D3VC.ai is in a fortuitous position of having a completely full proprietary dataset of all offerings since equity crowdfunding started. 6,100+ companies, 125+ data points on each, and a 6 person team with tremendous experience in AI and big data, they backtested their dataset with impressive results and are actively raising a $5M fund seeking to make average investments of $25k.
How much can D3VC.ai rely on their ai models compared to human level due-diligence?
Quite a lot, I was told. While they still do a layer of due diligence on top of their ai models, they’re not trying to hand pick individual winners. Instead, their goal is to identify companies most likely to receive follow-on venture capital funding.
Think of it this way - if Company A raises an equity crowdfunding round at a $20 million valuation, and then gets a follow on round from a venture capitalist at a $40 million valuation - an investor who purchased shares at a $20 million valuation is sitting on a significant unrealized gain, even if the investor cannot yet sell those shares. While the company hasn’t been acquired or IPO’d yet, it’s a significant positive development for the investor on that hopeful path to a large exit.
D3VC.ai looked for patterns in their aforementioned dataset and optimized their algorithm to match this thesis with the highest expected returns. And as more data and outcomes are created overtime, the fund will learn from these signals to hopefully even more accurately predict companies that are more likely to have that next follow on round.
The goal of quant funds providing alpha by looking at patterns in past data, hoping to extrapolate them into the future, is not new. The well known disclaimer in finance “past performance is no guarantee of future results” is used for a reason. Like any type of fund, some quant funds succeed and others don’t.
That said, the unique angle of using ai to highlight companies most likely to graduate to a follow on VC investment, in the extremely inefficient equity crowdfunding market, is one you should be watching very closely.
D3VC.ai is only available to accredited investors due to regulations - if you are interested in learning more about the fund, contact the team at https://d3vc.ai/.
Regardless if the fund is of interest to you or your business, the big picture excites me. The opportunity set available to retail startup investors is beginning to draw institutional capital in - and if some of the brightest minds in the space see enough opportunity to deploy a $5M fund with $25k average size investments, that’s a lot of great opportunities available to all of us.