One of the most exciting things about the evolving ecosystem of investment crowdfunding is that that it’s creating not just a large number of similar platforms (though that is happening, especially in real estate), it’s also fostering a diverse mix of platforms experimenting with a range of business models and niches. iSelect Fund is a great example of a platform that shares much in common with more traditional venture capital firms, but with important differences enabled by the evolving investment crowdfunding regulatory landscape and ecosystem.
Rather than try to run head to head against traditional Silicon Valley VC funds, iSelect Fund targets mostly Midwest companies that because of their location and sometimes their industry (eg AgTech) might not fit with the pattern a West Coat VC is looking for. And unlike traditional VC funds where investors don’t get to choose which specific companies are funded (that’s delegated to the fund’s General Partners), with iSelectFund investors opt-in to each company.
Types of investments iSelect Fund offers
iSelect Fund offers investments in early-stage startups, primarily those operating in the Midwest and Central US, and with a focus on the AgTech, Energy, Healthcare and B2B sectors. The minimum investment amount per company is $5,000, though investors must invest at least $50,000 in aggregate (with the balance kept in a non-interest-bearing account until fully deployed).
What do you get when investing with iSelect Fund?
Investors receive membership interest in a network of special-purpose investment vehicles (LLCs). Via the company’s FAQ:
Investors who invest in the Fund will each be assigned a unique series (a “Sub-Fund”), and the Sub-Fund will be the beneficial holder of Portfolio Company securities selectedby such investor. The Sub-Fund and the Company are managed by iSelect Fund Management, LLC (the “Manager”).
Investment types vary by company raising, but among investments available at the time of this writing were primarily preferred equity and convertible debt.
How does iSelect Fund make money?
iSelect Fund charges a one-time setup fee as well as an annual management fee. According to their website, “if iSelect’s annual expenses are less than the aggregate management fees collected for the year, the difference is returned pro rata to investors.”
As with many venture investments, the primary way iSelect makes money is on what’s known as “carried interest”, which means they receive a percentage of all the profits once 100% of investor principal has been returned. iSelect’s 15% carry is on the low end (most venture funds would typically charge 20%). As an example, if you made a $10,000 investment that was later worth $20,000, iSelect would keep 15% of the $10,000 gain, netting you $18,500.
Potential returns and cashflow
Investments via iSelect Fund are high-risk investments in startups. Most of the investments have no explicit expectation of payments, dividends, or other cash flow. Most startup investments lose some or all of their value. While some investors achieve excellent returns from startup investing, that is a rare outcome and requires substantial diversification over time combined with very careful investment selection.
Breadth of offerings on iSelect Fund
As of this writing, iSelect has funded 24 portfolio companies for a total of $77M, with 9 investments currently open for funding. Notably absent from the company summary pages is any indication of how long each raise is open, as well as how much (if any) has been committed to date (both of those are par for the course with Reg CF sites, and are increasingly common among Reg D platforms as well).
Regulatory framework and due diligence expectations
iSelect itself is what’s known as an “Exempt Reporting Advisor” which is variant of a Registered Investment Advisor. Investments are offered under SEC Reg D, and are only available to accredited investors.
iSelectFund has a Selection Committee that reviews prospective investments (it would be nice to see a bit more diversity among that group, though in fairness that’s a challenge throughout tech).
Once approved by the Selection Committee, investments are then passed along to their affiliated broker-dealer (currently Rainmaker Securities, LLC), which performs another detailed layer of due diligence and review, including things like criminal background checks on key executives and a detailed review of financial statements. You should of course do your own due diligence (including research outside of what you find on the platform.) There’s more about broker-dealers and other platform types over on our blog.