Venture Capital

Alternative Venture Capital: The New Unicorn Investors | Mayer Brown Free Writings + Perspectives

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In a new paper, Alternative Venture Capital: The New Unicorn Investors, professor Anat Alon-Beck explores the rise of alternative venture capital (AVC) investors and the ways in which these investors are affecting unicorn companies.  The paper cautions that that many of the calls being made by industry groups, such as the Institute for Portfolio Alternatives, the Committee on Capital Markets Regulation and others to broaden access to retail investors to private investment opportunities as more companies choose to remain private longer, should be considered carefully in light of changes in the types of institutional investors.  The paper also points to action taken by the Department of Labor (DOL) in June 2020, through an information letter providing greater latitude to plan fiduciaries to invest in private equity funds if certain requirements are met.

The paper identifies AVC investors as institutional and high net worth investors, mutual funds, hedge funds, corporate venture capital, private equity and sovereign wealth funds.  Alon-Beck’s paper reviews the dynamics in the private capital markets, which have changed significantly in recent years.  For example, she notes that often, AVCs are competing for investment opportunities, reversing the usual dynamic of companies and entrepreneurs competing for capital.  As a result, AVCs may be outbidding traditional venture capital (VC) investors in connection with unicorn investment opportunities.  Much of the paper focuses on the differences between traditional venture capital investors and AVCs.  Generally, AVCs are not interested in exerting control over the companies in which they invest, and allow entrepreneurs to continue to maintain their positions of control.  Often, as noted in the paper, the AVCs may provide liquidity to early equity investors, allowing the company to remain private longer.  By essentially providing an exhaust valve and relieving some pressure on the entrepreneurs, giving liquidity to employees and early investors, AVCs may make it easier for entrepreneurs to retain their control stake for longer, even as the company matures.

The paper also compares the behavior of venture capital investors and that of AVCs, which affects corporate governance.  For example, as opposed to VCs, AVCs are less likely to take board seats and, therefore, less likely to directly monitor their portfolio firms through board participation.  AVCs may be more interested in investing in competing companies and less involved in taking an active role in the board of the portfolio company as a result in order to minimize conflicts of interest or to avoid corporate opportunity concerns.  AVCs may, instead, be more focused on economic rights.  They may bargain more actively for contractual protections, such as redemption rights and IPO protections, such as IPO ratchets, or M&A ratchets, instead of the traditional monitoring rights that often served to avoid related party transactions, self-dealing and other misbehavior at VC-backed companies.  As a result of this changed landscape, the article cautions that policymakers should consider carefully providing greater retail access into private markets.

See the full paper here.

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