Arlan Hamilton Was Homeless When She Crowdfunded a $20 Million VC Firm. Here’s How She Did It
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Arlan Hamilton, who was sleeping rough on the San Francisco Airport floor in 2015 when an investor gave her the first check. This set her up to become a venture capitalist.
Hamilton, then 34, hadn’t attended college and had been working in the music industry. She read up on venture capital, and realized that it was something she wanted to do.
Now, six-and-a-half years later, Hamilton’s VC firm, Backstage Capital, has invested about $20 million in nearly 200 companies, and is in the process of raising a new $30 million investment fund. Backstage has emphasized underrepresented founders such as women and people of colour, and LGBTQ entrepreneurs.
“Many of them talk about how we were their first check or we were their first round, or we were the people who stayed with them for years and believed in them,” says Hamilton. Only 2% of the venture capital funds were invested in last year’s companies with female founders. PitchBook. According to a study, only 0.64% of VC investments have been made in Black or Latinx women founders since 2018. An analysis for 2020By DigitalUndivided.
Hamilton claims that Backstage is still struggling to get money from corporate and institutional investors in order to fund these startup investments. She is determined to launch. Funds worth $36,000,000 in 2018After an investor pulled out, the attempt to fund Black female entrepreneurs was abandoned. Hamilton was able to raise another smaller fund.
“I want to share this journey, not because I think I’m exceptional, but because, like many people, I have been exceptionally underestimated,” Hamilton wrote in her 2020 book It’s About Damn TimeThis book was published in paperback last month.
To help finance her firm’s operations and open up access to returns from venture capital investments, Hamilton last year raised about $5 million using a new crowdfunding model. Government regulations generally restrict venture capital investing to “accredited” investors, Requires most peopleA net worth greater than 1 million or $200,000 annually in income. But, using a new regulatory framework, Hamilton was able to sell shares in her VC firm itself to anyone—and is committing to sharing returns from its investments with them.
Hamilton discussed with TIME the new approach to funding, her unusual journey as a VC as well as how she regards accumulating wealth and activism.
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The following interview was edited and condensed for clarity.
How did you get started as a venture capitalist.
I jumped in. I didn’t know what a venture capitalist was in 2010. While I was touring with musicians, I became aware of startups and began to fall in love with them. I felt like an entrepreneur and learned about venture capitalists. I just didn’t know exactly what to call it or who my people were. So I made a grand plan to move to Silicon Valley and start my own tech company. In order to achieve this goal, I did research. I didn’t have much money and I didn’t have any connections in that world, but I knew it was for me.
My research showed that over 90% of angel and venture funding went to white men, a nation where they are one-third the population. This surprised me as an unconnected gay Black woman from the South. I thought, ‘That doesn’t seem like that’s going to end well, if that stays the same.
Instead of trying to find out how to fundraise money for my company by going to work, I learned to fundraise myself through any interview and book that I could find. The phone started ringing, the emails were sent in the hundreds and slowly I was making my way and making progress. Five years later, I was presented with a $25,000 check. It would be the beginning of my investing journey.
Is it possible to expand access to capital for venture capital investment?
What we’ve done so far is two things: we make it possible for accredited and non-accredited investors to invest alongside us in deals where we’ve negotiated the terms that they wouldn’t get themselves. We’re using things that were already built, with the Jobs Act for unaccredited investors and special purpose vehicles for accredited investors. We’re just utilizing that a lot more than most funds use it.
Our 2021 accomplishments Regulation crowdfundingThat was more revolutionary. In the past, in the U.S., you haven’t been able to have ownership in the management company of a private venture fund. In the fourth quarter 2020, I looked into the various rules and regulations. Together with Republic.co and my legal team, we found a way for that to be legally made and fully compliant. We presented the idea to SEC, and it was approved. Now, other people also have the ability to do this.
So what that means is 6,500 people invested approximately $5 million over an eight-day period in Q1 of 2021 to now become partial owners of Backstage Management Co., which shares in any upside that we have as a fund across any investment we’ve ever made in the past and will ever make in the future, as long as they hold that stock.
To be clear, that’s not an investment in the companies that you’re investing in, but it’s an investment in your own company, which gets returns from those investments?
Yes. Yes, as the managing partner at Backstage, I am entitled to a large portion of carry share and carried interest. A fund will usually have partners who share the funds. What you don’t find in a fund is a partner who shares that—in this case 13% of it—with the crowd. It just doesn’t happen.
It’s not Bitcoin. It’s not going to happen overnight. Backstage will see us start to earn returns over original investments made by our limited partners. I wouldn’t have been able to cash a check worth a million dollars. I now plan on sharing that check with at least 6,500 people.
The advantage for you is that it gives you cash to operate your firm…
Yes. As a fund, in the immediate, you have a management fee and it’s based on usually 2% of whatever assets under management you have. Well, we’ve never had more than $20 million under management at any given time. And so that’s not enough to run any fund. This was also an effective way to have an immediate runway.
It is actually quite insulting how little we’ve raised comparatively based on what we’ve done. But we didn’t sit around and say, “Oh, well that sucks.” And fold our arms. We said, “Well, let’s find a different way.” So it’s a win-win situation. Our portfolio is stronger because we have more runway. That hopefully will lead to a portfolio that wins. Our hope is that 2021’s money will have a greater value than it did over the next ten years.
You said that it’s insulting the amount of money you’ve raised relative to what you’ve done. Have you found that there’s been more friction in raising money than you anticipated?
Yes. It is not easy to raise money. It is important to remember that raising capital can be very difficult. There are thousands of potential investors who see us as viable and would be willing to pay more. We also have many accredited investors. A few dozen people have made investments in our funds. But when it comes to institutional investors and corporate investors who are throwing money at one company at a time, in some cases that fail, in my opinion it’s insulting that we have to scrape for so little.
For instance, we’ve only raised $6 million of our $30 million raise. There are also white men who apply our thesis to get $300 million or $200 million for a fund. They have been at Facebook for 2 years. But they haven’t done the work that we’ve done for the past decade, I’ve done for the past decade and our team has done for the past six, seven years.
After George Floyd’s killing, there was a lot of talk about investing in the Black community and Black entrepreneurs. Are companies delivering on the promises they made to invest from where you are?
There are some that are and others that aren’t. A lot of this was talk. Much of this was PR scrambling. Some of it was true. Some was genuine change. Microsoft seems to have done an amazing job in following through. I think the people who already got it beforehand are the ones that I’m seeing doing a better job. They invested in the accelerator with Satya Nella, Microsoft’s CEO. We didn’t have a relationship with them post-George Floyd. So it’s not that I’m saying that they’re great because they gave us money—I just noticed that they’ve been putting their money where their mouth is.
Others are also doing great work, I believe. Bank of America is doing a great job with our fund. What I noticed with Bank of America, which I didn’t notice with most of these other companies like PayPal, is that with Bank of America, every single person I talked to was Black, who had the decision making ability. PayPal was not populated by Black people. They all passed. JP Morgan: A Black person would say yes to a white person saying no. Patterns are what I see. I don’t think there’s much bias to it. It’s just what I’m seeing. Right?
While the returns from venture capital have been greater over some period of time than putting your money in an S&P 500 index fund, it’s more risky. What’s your rationale for expanding access to a riskier class of investment?
There are a few things. First, the lottery is extremely risky. But this country is open to Black and brown individuals spending half of their salary on lottery, casino, or other lottery-related activities. Ollen Dougs, Motley Fool Ventures, pointed out that seven of the ten largest companies in America were venture-backed. For better or for worse, I think there’s not an equal playing field. We should have an opportunity to participate in that.
I also think, speaking of George Floyd, that if Black people had more wealth in the country, simply put, we wouldn’t have watched a Black man get murdered on television because the policies that would have already been in place one could assume would have had this sort of thing in mind. If there were more richer people—and even more so, not the 1%, but just richer people—who were Black and brown they then could influence policy. Then policy can influence what is happening on the streets. So all of it’s important. To me, success and wealth as well as future wealth are all about activism. My activism is being wealthy and successful as well as opening doors for other people who are like me.
When you say it’s activism, what do you mean by that?
Different people are active in various ways to support different causes. People march on the streets, as I did. There are people who will chain themselves outside of government buildings, or so they don’t knock down this building, don’t do this pipeline. They’re risking life and limb. They’re risking reputation. They’re risking livelihood because they believe in something so strongly. That is what I’m doing by being so brazen in public, and being so non-humble in public. And also I’m being called a key maker, not a gatekeeper. So I’m throwing open the gates for others to follow me and in doing so I risk life and limb, reputation, livelihood every single day, because I want it to change something in the future, whether I see it or not. This is what I desire to see happen.
How can you create wealth generationally for those underrepresented in society, especially Black Americans?
It’s a pleasure to own a home. Ownership is important to me. Entrepreneurs start their own businesses, and people who work early in their careers to make a profit. So that’s why I like entrepreneurship so much.
Investors are a great way to help people. That’s why I do talk about that. Entrepreneurship is more important for the generational benefit. When I look at the top 100 richest people in America, I look at what they’re doing and either they inherited stuff or they’re building stuff, they own stuff.
This is how I see ownership. It is possible to get someone to own something either by making it or by helping them invest in the company. It all works in this direction.
Some people think investing in cryptocurrencies is a way to build generational wealth, a way to have freedom, a way to have ownership that’s immutable that people can’t take away from you. Are you a believer that investing in cryptocurrency is the best way to achieve these things?
I don’t have any opinion of cryptocurrencies that’s worth sharing.
What are your options for deciding what investment?
Today at 41, I say, “Within 10 years, could I build this myself?” Could I learn everything about what you’re doing and build it myself and be successful? If I could, it doesn’t have my attention. If I couldn’t, it has my deep attention because I can then both live vicariously through you and I can also effect greater change—ripple effect—if I can help catalyze what you’re doing.
What do you want to be in five years’ time?
My goal is to be the wealthiest Black woman in America. I’m likely to join the ranks of Oprah, Beyonce, Rihanna, Serena and all the others. Backstage would have provided at least half the amount, and I would use it to help other entrepreneurs or emerging investors. And hopefully I’ll just be wearing purple tracksuits every single day and living on a tour bus.
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