ff Venture Capital to Public: We Are Fundraising

FF ventures

An eighty-year-old ban on general solicitation, officially lifted in September, denied startups and VCs alike the power to announce fundraising plans publicly. Suddenly ungagged, some startups jumped to declare they sought money, while VCs waited––until last week, when New York-based ff Venture Capital flipped their door sign to “We Are Open.”

“We are pleased to announce that ff Venture Capital is the first institutional venture capital firm to embrace the JOBS Act’s lift of the ban on general solicitation and publicly announce that we are raising capital for our third fund, ff Rose Venture Capital Fund,” the firm declared via a blog post last week.

The early-stage investment firm now seeks $50 million to $70 million for its new “Rose” fund, which will close in November. ffVC last raised $27 million for their Silver fund in 2010.

By all accounts, the firm goes boldly where no VC has gone before. With the move to solicit money publicly, ffVC hopes to make fundraising more transparent and lower the barrier to entry for firms like themselves. “We’re a [small] early-stage venture capital firm and we have excellent returns,” says Aishwarya Iyer, director of communications for ffVC. “There’s probably people out there just like us who are having a much harder time raising capital because it’s been such an antiquated, 17th century way of doing things.”

Historically, seven types of limited partners financed venture capital: sovereign funds, endowments, pension funds, insurance or financial investors, family funds, corporate VCs, and funds-of-funds. Whether looking for big returns or disruptive tech, LPs often chose VCs to back based on résumé, portfolio and good name––which left smaller firms with shorter histories no sway in the industry.

The number of “active” firms investing at least $5 million a year has decreased from 1,022 in 2000 to 462 in 2010. The Wall Street Journal reported last year 923 firms invested once, at minimum, in an America-based company in 2011 (from Dow Jones VentureSource). The VC ecosystem has struggled to bounce back after making monster investments at the millennium.

Last year, total investment decreased; and if half-year 2013 amounts double, investments in sum will be $25.3 billion––even less than in 2012. “Venture capitalists invested $26.5 billion in 3,698 deals in 2012, a decrease of 10 percent in dollars and a 6 percent decline in deals over the prior year,” says last year’s PwC MoneyTree Report. “Additionally, stage of investment shifted from Seed to Early Stage in 2012 as venture capitalists overall began engaging with companies later in their life cycle than in previous years.”

LPs trust their money to top firms. But these cream-of-the-crop VCs can only take so much capital, which leaves an excess of money going nowhere.

Openness allows underdogs to access money, and gives small firms and startups a fighting chance against uber-connected companies and funds with stacked portfolio résumés. “When a fund that supports startups wants to raise capital, historically they had to do it on a one-to-one basis, meaning they had to have a pre-existing relationship with the person they were speaking with,” Iyer says. “It was this very old-boys network, friend-of-friend, super-close-connected and not at all transparent.”

“The elimination of this ban opens up the opportunity for…private issuers (private equity firms, hedge funds, and within private equity firms, venture capital firms) to…spend less time raising capital,” she says.

Firms may now exchange old-world deal-making methods for Twitter and Facebook, to a certain degree.  “They are able to market to a broader number of people use 21st century technologies like social media and email marketing and other sorts of channels to tell the world that they are raising money,” Iyer says. “When they do that it democratizes the process.”

Detractors will have a hard time making a case against what’s framed as a transparency issue, or an attempt at leveling the playing field. But opening the doors to back rooms has consequences.

Joe Wallin, Seattle-based startup and corporate transactions attorney (as well as author of the Startup Law Blog), discusses how opposing camps see the issue. Some feel that “people who shouldn’t be [involved in these high-risk financings] in this risky segment will become drawn into it, because they’ll become more aware of it,” he says.

But you can’t lose cash on a deal you don’t know goes down––and what these investors don’t know about can’t hurt them. “[The anti-transparency crowd] could probably make parallels [between] general solicitation of private securities offerings to mass-marketing of psychotropic drugs,” he says. “It used to be you couldn’t advertise psychotropic drugs on TV; the only way people found out was through their doctor.”

Before, those medications weren’t used by many, Wallin writes in an email. “Now, we have mass-marketing of psychotropic drugs and we have a very significant percentage of the population on them,” he says.

On the flip side, some feel the newly-renovated fundraising process helps jump-start job growth. “The argument ‘For’ is: this is where America creates jobs, and so it’s great that more money is going to go into this early-stage segment,” he says.

The other “Pro” argument, according to Wallin: “Freedom for freedom’s sake. Transparency helps everyone,” he writes in an email.

Keep in mind, however, this new model mostly affects other millionaire investors. General solicitation remains far removed from crowdfunding. The JOBS Act allows only accredited investors––i.e. the documented wealthy––to fund VCs engaged in publicly-disclosed fundraising.

Firms gamble when they generally solicit money, though. The JOBS Act permits public fundraising announcements; but the legislation comes to startups and VCs accompanied by proposed stipulations requiring paperwork to be filed on a specific timeline as well as detailed document-keeping, with severe penalties awaiting those who fail to comply. With the JOBS Act, “clearly the Congressional intent was to make it easier for companies to raise money, and the proposed rules would boobytrap the entire ecosystem,” Wallin says.

While Wallin hopes for a JOBS Act sequel that will fix what’s wrong with its first iteration, ff Venture Capital breaks new ground with the general solicitation legislation providing legal foundation for their actions. “We think that this is the way of venture fundraising,” Iyer says. “We really, firmly believe that this is the future.”