Today, when a club lead (i.e. a business angel who gathers a community of investors and shares investment opportunities with them), decides to invest in a deal, they have to:
- source deals (usually from their network),
- run a due diligence process, which means they need to get in touch with founders to get access to company documents,
- convince the company they’re investing in to accept them on their cap table,
- raise funds within their community,
- and, finally, they need to structure and manage an investment vehicle. Today, this is usually done by setting up a Special Purpose Vehicle (SPV) with corporate lawyers.
What if there was a substitute to setting up an investment vehicle with the help of lawyers? What would the investment process look like?
This is where simple economic theory can help us.
Substitute and complementary goods
We need to understand substitute and complementary goods, and the best way to do this is to think through an example.
Let’s imagine that a technological breakthrough brings the price of tea ten times lower. The demand for coffee, a substitute good will plummet. Because the price of tea decreases and consumption in turn increases, the demand for lemon, cream, and sugar will increase. They are complementary goods.
Let’s come back to our club lead. To invest in a deal, our club lead needs to structure an investment vehicle. Today, this is usually done through the help of corporate lawyers who help set up an SPV for the deal. A substitute would productize investment vehicle structuring and help to fundraise. By automating expensive corporate lawyers’ manual tasks, it would be a cheaper option for club leads. It would thus lower the demand for its substitute. But the demand for complements, like the club lead’s specific skills to get deal flow, identify great deals, and get a seat on the cap table, will skyrocket.
This is great news for founders. If it’s easier to gather a community and co-invest in deals, more people will be willing to start an investment club. As competition intensifies, club leads will have to show more value than their counterparts to secure a seat at the table and invest in a startup. It gets easier for club leads to go invest with their community and founders get more value from their investors. Everyone wins.
With Roundtable, we productized investment vehicle structuring and management to help club leads with fundraising. This new product will lead to a surge in both the number and quality of investors in the market.
But that’s only the first step.
As value flows upstream in the investment process, we want to help there as well. In early-stage venture capital, sourcing deals, identifying opportunities, and getting a seat on the cap table are highly social activities.
This is why after productizing fundraising, we’re building a social investment platform to help with this value creation.
- The demand for substitutes to investment vehicle structuring, such as corporate lawyers setting up SPVs will decline.
- The demand for complements, such as BA skills required to network, identify deals, and convince founders that you can help them, will increase. In early-stage venture capital, these complements are highly social in nature.
- People who may have previously chosen not to create an investment club will be more willing to start one, overall great news for founders and the tech ecosystem.