Velvet’s fund manager “marketplace” is streamlining the private investment process
To get into the world of private investment funds, it seems you’ve got to know a guy who knows a gal who can give you the details. It also requires a face-to-face meeting to start the conversation. It’s a laborious, time-consuming, relationship-dependent process that can often take months.
Velvet is determined to change all that, bringing fintech’s streamlined efficiency to the labyrinthine ecosystem of private investing.
Rethinking the private investment world
“We help funds that are a venture fund, a hedge fund, or a private equity fundraise money online from institutional, large investors,” says Alex Johnson, Velvet co-founder and CRO. “On the other side, we help investors find funds, compare them against each other, and actually invest.”
To source the funds, says co-founder and CEO Andrew Pignanelli, “We’re all over the place…We find them, get them on the platform, and standardize information about these funds in a way that’s never really been done before so that a manager can be compared against another one. You can imagine how inefficient the [traditional] process is and how difficult it is to make these decisions objectively. All of the asset managers who are trying to invest in these funds—we call them allocators—are losing tremendous amounts of time and money and efficiency because of the system.”
Johnson agrees the private investment process is painfully slow. He says Velvet changes the whole equation by placing information months ahead of time in the process. “We use our aggregated data on the platform to start the conversation with: ‘Hi, I’m interested in investing in you,’ rather than: ‘Hi, what do you do?’,” Johnson says. “When you’re writing a $10 million check to an institution, you need to make sure they’re not going to mess it up. It’s a big deal.”
Hitting the street—and the data
To aggregate that critical data, Velvet combines its face-to-face relationship-building, research, and diligence with data science and AI. The co-founders travel the country, meeting with fund managers to connect with and vet them for Velvet’s services. Fund managers are motivated to partner with Velvet because they want to raise capital, and Velvet provides them with a credible stage.
“So, let’s say they need to raise a $100 million fund. They say, ‘Okay, we’ll pay Velvet’s fee,’ which is success-based. It’s free to list on our marketplace,” Johnson says. “They sign up and put all their info in and give up their data to raise money, and we create a listing for them. It’s not unlike Airbnb—except instead of listing a hot tub and ocean view, it’s their metrics: how they perform, who they are, what they do, where they’ve been, what they’ve invested into, and why you should give them your money.”
This software allows both the fund to offer information at scale and also for the Velvet team to evaluate them at scale. “We have a broker-dealer team—a compliance team—that reviews the fund manually to ensure they can take money from the investor,” Johnson says.
Velvet is not the first fund marketplace. But as Pignanelli explains, there are key differences in Velvet’s approach. Other databases—like Pitchbook, for example—collect data on funds, but they do it via web-scraping and other methods without involving the funds directly.
“That doesn’t really align incentives with funds to continually update their information and make sure it’s the most in-depth,” Pignanelli says. “We work with the funds and say, ‘If you maintain your data, you probably have a higher chance of raising money with the investors on the other side.’ It’s like how people who are looking for a job will always update their LinkedIn. It’s the same thing with funds.”
Velvet works through partners who use AI to score fund managers and review the deals they’ve done, Pignanelli says. “That lets us collect more data on these funds and keep it up-to-date more than anyone else in the world—even the investment banks that have emerging manager programs. They work with hundreds of managers and have staffs of thousands, but they don’t have as in-depth data as we do. We have someone who’s a full-time data scientist who does analytics on that, and the rest of our team does the charting and back-end stuff.”
Velvet launched the fund side of its platform in November 2021, and the company already has $120 billion in investor assets represented. With the soft launch of its allocators’ side of the platform last month, Velvet’s co-founders are excited about the momentum—especially considering they’re in their early 20s and are the youngest pair to receive a broker-dealer license. They spent six months last year working with their team to acquire the license, which is officially held by Velvet’s subsidiary Decheque Securities, LLC.
An outsider’s perspective
Velvet is upending the otherwise entrenched world of private investment funding, and the co-founders are excited. “Velvet operates at the highest level of private finance,” Johnson says. “We work with institutions, billion-dollar families, endowments, and funds of funds so large they buy portfolios of funds. They’re looking for unique strategies. The average funds are doing 40 percent a year; some do triple digits.
Johnson got into this space because he started a bitcoin fund back in 2018 that’s about to hit quadruple digits this year, he says. “I wondered, ‘What if we built a marketplace where fund managers could raise money?’ It’s come a long way since. Andrew and I are total outsiders. We’re fintech people; we’re not coming from the highest levels of finance. We’re coming from the outside and figuring it out. That’s allowed us to solve problems others can’t see.”
That kind of acuity is exactly what can start a revolution. So to all the accredited investors and fund managers looking to score the next gazillion—viva la fintech!