The 99 Investor Rule is just one example of problematic gatekeeping in venture capital.
Here’s what we know. Existing rules keep a lot of people out of investing in venture capital.
Why is this a problem? Because venture capital is consistently one of the highest performing asset classes in existence. As a result, people who can afford to invest in venture capital funds have the potential to make a lot of money. Keeping people out of venture capital, therefore, is a barrier to wealth creation.
(Obligatory disclaimer: You can lose money investing in venture capital. VC is the riskiest asset class. High risk often goes hand-in-hand with high rewards.)
In addition to the more well-known accredited investor rule, one major way people are excluded from this high-reward venture opportunity is something called the 99 Investor Rule. The U.S. Securities and Exchange Commission (SEC) applies the 99 Investor Rule to private venture funds raising $10 million. It limits the number of outside investors in a fund to 99. The general partners of a fund come in to make 100 total investors.
Why This Is a Problem
Unless you are independently super-wealthy, venture fund managers must find outside investors to build a venture fund. These investors are called “Limited Partners” or “LPs” for short.
If you are raising a $10 million fund (like my team at Tundra Ventures is doing right now), math says you need to find 100 LPs writing an average check size of $100,000 to get your fund to a total of $10 million. Most people don’t have $100,000 lying around to invest, let alone in one asset class. And even fewer women and people of color have the means to invest at that level.
Furthermore, while a $10 million fund sounds big to most (normal) people, it is absolutely miniscule when it comes to venture capital. Even a $50 million fund is small in the world of venture, and most fund managers aim to raise larger funds over time.
As funds get bigger, though, minimum investments also must get bigger. This excludes even more potential investors and concentrates wealth for the already super rich. And we at Tundra Ventures aren’t the only ones who think this is a problem.
To sum up, the 99 Investor Rule excludes investors who want to get into venture capital investing, don’t have time (or the experience or the confidence) to make individual angel investments, and can’t meet fund minimum investments which are usually at least $100,000 (or more often closer to $250,000 or $500,000).
Addressing the Problem
Here are two examples of how existing venture funds are inviting more LPs to the table while still complying with the 99 Investor Rule.
Bring Smaller Investors Together To Simultaneously Invest in Multiple Funds
A group of investors are allowed to come together to invest in more than one fund or investment opportunity. It’s important to note a group of smaller investors cannot get around the 99 Investor Rule by coming together with the purpose of investing in just one single fund. Basically, the SEC thinks this is cheating. If you do create an entity with multiple investors for the purpose of investing in just one fund, the SEC will “look through” the entity and count the number of people who own the entity against the 99 allowed investors, so you’re back to square one.
However, if a bunch of smaller check writers come together to invest in more than one fund, the SEC thinks this is kosher. A great example of this strategy is the partnership the emerging fund managers leading RareBreed Ventures, Rogue Women’s Fund, and VITALIZE Venture Capital recently launched. Their new special purpose vehicle (SPV) allows those who can’t typically meet venture capital fund minimums to access all three of their funds with one accessible investment commitment.
Specifically, the joint SPV allows accredited investors to invest a comparatively small $10,000 per year over four years into all three funds at once. The bottom line? Smaller investors can now contribute to these three $10 million+ funds in a way that’s not been possible before, and they can garner higher-potential VC returns by doing so.
Leverage Larger Check Writers to Make Space for Small Checks
Another way we can invite more LPs to the table is to leverage investments from larger institutional LPs. Often, institutional LPs (in contrast to individual LPs) write checks of $1 Million or more into smaller venture funds. These large checks can help fix the math problem caused by the 99 Investor Rule.
For example, Tundra Ventures has decided that for every $1 million+ LP (like F.R. Bigelow Foundation, our anchor investor), we are going to open up a certain number of slots for smaller check writers. We’ll prioritize LPs with identities we don’t see as often as we’d like (one of our values is to have an LP base that looks more like our portfolio CEOs) meaning more women and more diversity.
There's More Work to Do
Neither of these 99 Investor Rule workarounds fix the gatekeeping problem represented by the SEC’s accredited investor rule (requiring a net worth of $1 million or an individual salary of $200k/year or $300k/year with a spouse). And both solutions require more work on behalf of the emerging managers spearheading these creative new solutions.
However, allowing LPs to write smaller checks—especially LPs who identify as women, people of color, LGBTQ+, and non-binary—has the potential to help close the persistent wealth gap we see in our community.
