It’s like buying call options on startups — an innovative pre-equity fundraising structure.
Venture capital is one of the most intriguing areas in alternative investing.
Yes, startups are risky. About 90% of them will ultimately fail.
For those that survive, the profits can be enormous. Returns for early-stage investors often exceed 100x.
But here’s the problem: the current VC model (i.e., the “Silicon Valley model”) is fundamentally not built for everyday investors.
It’s designed for institutional funds with the capital and access to assemble massive portfolios of startups.
Today, I’m exploring an entirely new model for startup investing called VentureStaking.
We’ll learn:
- How VentureStaking’s unique pre-equity structure works, offering investors the right (but not the obligation) to invest in future equity rounds
- How this novel structure can reduce the cost & risk of investing in startups by up to 90%
- Why community-focused founders could turn to VentureStaking as a form of simplified capital raising to conduct early-stage R&D
- And how investors can purchase the world’s first-ever VentureStake in Doriot, the company behind this innovative idea.
It’s not often that we get to explore an entirely brand-new asset class on the newsletter – and even rarer that everyday investors get the chance to participate in it.
Express interest in VentureStaking™ →
Both accredited & non-accredited investors are eligible.
Let’s explore 👇
Table of Contents
Venture investing is built for VCs
Take a look at the chart below.
This is the current year-to-date performance of all the stocks in the S&P 500.
You might notice that this looks close to a normal distribution. And that’s no accident.
For large, mature companies, performance tends to be evenly distributed – no single firm is responsible for a disproportionate level of the S&P 500’s performance.
But when it comes to venture, the situation couldn’t be more different.
The performance of early-stage firms is dominated by a power law, not a normal distribution.
The vast majority of startups go bust. But the ones who survive can deliver astounding returns.
For startup investors, this power law dynamic has huge implications:
- Because venture investing is so risky, diversification is even more important than public markets.
- And because returns are driven by so few companies, missing out on a good investment is often much more detrimental than making a bad investment. (no wonder VCs get so much FOMO)
- As a result, portfolio quantity is the name of the game. It’s not uncommon for venture funds to back hundreds of different startups.
Retail investors have it tougher
Now, institutional investors might be able to navigate the power law just fine. But it can create real problems for everyday “retail” investors.
If you’re an individual looking to build a diversified startup portfolio, capital costs quickly become a problem.
The average check for a follow-on investor in a seed round can easily eclipse $100k.
And access is an issue here too. Due to regulatory restrictions, some of the most interesting startup deals are made behind closed doors, with no chance for individual participation.
In recent years, exemptions like Reg A and Reg CF have definitely leveled the playing field a bit. But these tools come with their own issues. They can be expensive for founders and come with investment restrictions for individuals.
To put it bluntly, traditional venture investing is largely built for VC funds – not for everyday investors.
What’s needed is an approach to venture that puts individuals before institutions.
And that’s exactly the mission behind VentureStaking.
What is VentureStaking™?
VentureStaking is a totally new approach to startup investing, pioneered by Gerry Hays at Doriot.
Gerry has been involved in the startup world for decades as a founder, an investor, and a professor of Venture Capital & Entrepreneurial Finance at Indiana University.
From his time in the trenches, he’s seen exactly why the traditional venture model is broken – and created VentureStaking as a potential solution.
At its core, VentureStaking is a type of pre-equity fundraising that allows founders to test and validate their startups before formally selling shares to investors.
By purchasing a VentureStake in a startup, investors are providing capital for founders to conduct R&D and build a minimum viable product.
In return, these investors earn the first right (but not the obligation!) to invest in the startup’s future equity rounds – and with a valuation discount.
How it works:
- Founder pitch. Founders pitch the VentureStaking community, setting out the problem they’d like to solve and sketching a potential product they’d like to build.
- Evaluation. Stakers (investors) evaluate these pitches and decide which ones to back. Standard terms allow for up to $100 in future investment for every $10 in VentureStake purchased.
- R&D. After raising capital, founders use the funds to conduct R&D, keeping stakers informed along the way with regular accountability checkups.
- Right to invest when ready. Once the startup is ready to raise a formal equity round, stakers decide whether to double down by exercising their right to invest.
Gerry calls this initial capital raising the Discovery Round and sees it as a potential alternative to traditional friends & family fundraising.
Typical Discovery Round raises are expected to target $100k in capital, indicating about $1 million in potential equity interest.
And just like poker, founders may ultimately choose to fold, deciding not to pursue a problem.
Sure, stakers would prefer this doesn’t happen. But it’s an unavoidable part of the research process.
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Hasn’t VentureStaking been tried before?
VentureStaking is definitely a unique take on startup financing. Though to be fair, the model does build on a few important precedents.
One is the Search Fund — a vehicle in which investors provide capital for an entrepreneur to essentially go out and find + acquire a privately held company.
Search funds and VentureStaking have an important point in common: they’re more about backing the potential of a talented individual than they are about capitalizing on a specific, well-defined opportunity.
Another precedent is the Thiel Fellowship, which offers $200k for young entrepreneurs who want to “build new things.”
Like the Thiel Fellowship, VentureStaking doesn’t involve an equity stake (at least to start).
But unlike the Thiel Fellowship, VentureStaking allows anyone to back founders with vision – dramatically expanding access to both sides of the venture market.
What are the benefits of VentureStaking?
Benefits for investors
For investors, the fundamental advantage of VentureStaking is allowing a small initial bet on a speculative idea to turn into a huge follow-on investment in a viable project.
Earlier, I discussed how assembling a large portfolio of startups can be challenging for individual investors.
VentureStaking helps mitigate that issue in two clever ways:
- Quantity: Investors can get 10x leverage on their limited capital to maximize their total exposure. In other words, you can build a portfolio with $10,000 in equity potential for $1,000.
- Quality: Investors can wait to commit formal equity capital until founders have validated and tested their idea, increasing the likelihood of future returns.
Gerry calls this the “90/90 approach” – reducing the upfront costs of venture investing by up to 90% and the risk of investment failure by up to 90%.
And for founders, the benefits of VentureStaking are potentially just as enticing. There are three key reasons a founder might opt to raise a VentureStaking round.
Benefits for founders
1) Better access for “non-traditional founders”
Silicon Valley likes to emphasize its meritocratic culture. But money does not always flow to startups with the best potential!
- It’s no secret that raising money on Sand Hill Road is easier if you fit the traditional founder model (i.e., young, male, STEM dropout).
- Meanwhile, raising a “friends & family round” can be nearly impossible for founders who don’t come from wealthy communities.
- And for many developing countries across the world, venture capital infrastructure is woefully inadequate.
The beauty of VentureStaking is that it’s open to almost anyone with a great idea and the drive to execute.
The global community of stakers, not a single gatekeeper, decides which projects to fund.
With that said, Doriot thoroughly vets and screens potential founders (background check, references, and interviews.)
Critically, this process is to filter out those with bad intentions or inadequate preparation – not to decide which projects are worth funding.
2) Simplified early capital raising
In order to legally raise capital, startups typically need to conduct an exempt security offering.
You’ve probably heard of the different exemption pathways, like Reg D, Reg CF, and Reg A. (Contrary to popular belief, there is no friends & family exemption.)
These exemptions impose numerous burdens. In addition to legal & admin costs, there are often restrictions on investment marketing or investor accreditation status.
VentureStaking helps sidestep that issue entirely. How?
Because a VentureStake is not a security.
Thus, no exemption is necessary to sell one.
I’ll explore this point in finer detail later on. But for founders, the ability to raise capital without selling a security is more straightforward, less expensive, and opens up a wider investor base.
3) Invested, committed community
Community is one of the most valuable attributes that any business can have.
Take our word for it – Alts wouldn’t be what it is today without our powerful community.
Having a community fosters access to a ready-made group of potential customers, investors, marketers, beta-testers, and contributors.
In fact, companies like Substack have even raised community investment rounds to build a greater connection with stakeholders, even though they almost certainly didn’t need to.
VentureStaking helps build a committed community from the very earliest days of a startup, connecting founders with stakers through investment, passion, and accountability.
Doriot: The world’s very first VentureStake
In the last section, I looked at all the theoretical benefits of VentureStaking. But will these benefits play out in practice?
To find out, Gerry is ‘eating his own dog food,’ selling the world’s first VentureStake in Doriot.
Today, you have the option to purchase a VentureStake in the company itself, in amounts ranging from $10 to $1,000.
In return, you receive:
- The first right to invest up to 10x your stake in subsequent rounds
- 10% valuation discount
- Access to Doriot’s VentureStaking community
I already mentioned Doriot’s Qualified Accredited Investor Certification. The company also has several other education-focused products, including a startup investing simulation and deal reports.
But looking forward, the VentureStaking marketplace itself is an even bigger opportunity for Doriot:
- One of the most direct comps to VentureStaking is AngelList, a platform dedicated to early-stage startup deals. AngelList is valued at $4 billion.
- One of Doriot’s key growth strategies will be to focus on alumni networks from leading universities, a concept pioneered by Alumni Ventures. Gerry estimates that this market alone is worth $50 billion.
- And while VentureStaking is primarily designed to empower individual investors, institutions are already showing interest. Gerry is actively in conversation with family offices and venture funds.
Looking ahead, there’s $200,000+ in aggregate interest for Round 1, scheduled for later this summer.
As the inaugural VentureStaking round, this level of engagement represents a strong proof of concept.
Join Gerry in his mission to shake up the venture market – and potentially profit in the process.
Express interest in VentureStaking™ →
Challenges, risks, and the road ahead
VentureStaking is definitely an intriguing concept.
But as with any innovative structure, VentureStaking is bound to hit some speed bumps – and there are two key areas I can see creating real challenges.
Challenge #1: Regulation
In my view, there are two distinct ways to think about VentureStaking:
- It’s an exclusive club membership. This club offers access to educational resources and investment opportunities that they normally wouldn’t have (not unlike joining a sophisticated investment group).
- Alternatively, it’s like a call option on a startup (technically, it’s closer to a warrant). Stakers purchase the right, but not the obligation, to make a future equity investment with preferential terms.
For regulatory purposes, this distinction really matters!
Because unlike club memberships, derivatives are almost universally treated as securities.
In a 14-page white paper (!) Gerry laid out detailed arguments for why VentureStaking does not qualify as a security under the SEC’s infamous Howey test.
The basic idea: VentureStaking merely confers the possibility of making a future profit-seeking investment. This view is bolstered by the fact that VentureStakes cannot be resold.
And these aren’t just pedestrian legal arguments. Gerry earned his JD from the Indiana University School of Law and is a member of the Indiana State Bar.
But like many new asset classes, VentureStaking is in somewhat of a legal grey area, and will probably remain so until regulators explicitly bless or challenge Gerry’s interpretation.
Challenge #2: Investment rights
Another challenge has to do with understanding the exact investment rights that a VentureStake offers.
According to the fine print, VentureStaking confers a “first right to invest” in a startup’s Reg CF, Reg A, or Reg A+ rounds.
But none of these are historically exclusive affairs. Non-stakers can purchase equity alongside stakers.
With that said, there are two clear benefits here:
- Each of these exemptions comes with capital-raising limits, meaning the first right to invest does offer some value for startups who might hit the cap.
- And investing at a 10% valuation discount is obviously valuable.
Notably, the fine print doesn’t say anything about equity rounds raised outside these exemptions.
However, Gerry indicated that Reg CF will be used for all subsequent equity rounds, from seed to Series A and beyond.
Closing thoughts
Neither of these two elements is insurmountable. But it’s important for stakers in Doriot to be cleared-eyed about the challenges.
Doriot is essentially attempting to create an entirely new asset class. That’s bound to involve a few headaches!
But the potential payoff could be enormous. If Doriot can pull it off, VentureStaking could unlock a wave of new capital for ambitious founders to solve some of the world’s hardest problems.
And that’s the key: if you believe in the potential, you don’t need to make a big bet upfront!
With as little as $10, you can purchase a VentureStake in Doriot — securing your seat at the table if Gerry succeeds in unlocking venture for all.
Express interest in VentureStaking™ →
That’s it for today!
Come find me and Gerry in the Alts Community.
Brian
Disclosures from Alts
- This article was written by Brian Flaherty and edited by Stefan von Imhof.
- Gerry Hays was able to review a draft version of this article.
- Stefan has purchased a $500 VentureStake in Doriot.
This issue is a sponsored deep dive, meaning Alts has been paid to write an independent analysis of Doriot VentureStaking. Doriot has agreed to offer a deep look at its business, offerings, and operations. Doriot is also a sponsor of Alts, but our research is neutral and unbiased. This should not be considered financial, legal, tax, or investment advice, but rather an independent analysis to help readers make their own investment decisions. All opinions expressed here are ours, and ours alone. We hope you find it informative and fair.
