Backstage Capital’s Arlan Hamilton discusses how to find the next unicorn

'So the institutions are going to have to compete with the crowd now'

Arlan Hamilton, the Backstage Capital founder and managing partner, joined us at TC: Sessions Justice to chat about how she vets founders beyond Stanford signal, the changing role of venture capital, and how raising money from the community versus institutional LPs can impact Backstage strategy.

On what makes a founder make sense for Backstage Capital

In a world of $1 billion valuations for beta-stage startups and deals closed over the Twitter DMs within hours, it feels like the noisiest time in venture in the recent past. Hamilton talked a bit about how her firm, which has backed over 170 companies founded by underestimated founders, keeps focus. She got into if she follows trends, the dynamic of invite-only apps, and, of course, Twitter.

I just don’t engage and follow and I just don’t have the that same need to be on everything early in first and be everywhere. Really. So, I like to watch people kind of run around and ask for invites and things like that. It’s just not as important to me. It’s just a strategy of like keeping myself calm, because there’s always a VIP to the VIP section, there’s always a further, further, further, and I find some of it quite distracting. I think it helps just to know where I was just a few years ago, and to know, kind of what’s important … and not get caught up in any hype anytime. And I think that serves me well when I’m making investment decisions, too. Because people who interview me or are, you know, want insights from me, they are always asking me about “trends.”  And I just don’t know the trends. We’re kind of counter-intuitive and and dancing to the sound of a different beat anyways. So I think that’s all helpful when we’re looking at companies and finding things in different places. (Timestamp: 1:32)

Backstage Capital was in the fortuitous spot of being built on remote work before the pandemic made it necessary. Still, Hamilton said that vetting early-stage founders is a difficult thing to do, and Backstage Capital only backs about 2% of the founders it sees.

When you talk about founder-product fit, we have that in spades. I am gay, and if my wife and I wanted to have a child, there would be a lot that goes into that. There’s no accidental pregnancy with us. And so many people, you know, in the same boat, it’s almost like that with underrepresented, underestimated founders. They have so much to lose [and] I think they don’t have a second and a third and a fourth chance afforded to them. And so a lot of times, you’ll see companies that are built from such authenticity, and such genuine concern about a problem that they’re trying to solve, rather than so many companies I see elsewhere, that are how do we get rich the fastest way we possibly can. And that doesn’t always set you up with the right recipe for success. (Timestamp 8:04)

On the future of venture capital as an asset class

One thing that came up during the conversation was that Hamilton doesn’t see Backstage Capital staying within the definition of a traditional venture capital firm. At first thought, this shouldn’t come as a total surprise, considering the rise in popularity of alternative financing among startups, from debt raises, to rolling funds, to revenue-based financing loans.

But in reality, Hamilton says that she has always known that Backstage Capital was a vector into the exclusive world of investment, which despite modest progress has still been reserved for wealthy, white men. Here’s what she said when I asked where she sees herself in five years:

I’ve always said this, I don’t know if people pay too much attention to it, but I’ve always said that venture capital was the tool. It was the mechanism for which I could get in. I couldn’t be an angel investor, couldn’t do all these things. But, I could earn and learn my way in to venture capital. I’ve never been beholden to it. I’ve always said to that, I don’t know what the future holds. But I think maybe there’s another asset class that gets born. And we would certainly be part of that. And if that’s the case, I just think it’s a broken system. It’s an old system. There is a lot that needs to be fixed.

And, again, it’s the people are kind of living in a fantasy world … So I think, just the way that I came in, I’ll probably pivot or Backstage, we’ll find ways we’ve already started. I mean, if you look at the raise that we did on Republic recently … it’s just it’s an interesting thing. It didn’t exist, the way that we wanted it to exist … this ability to go to the crowd as a fund. And we trailblazing made a way; we made a path. And I think that’s what founders are doing. We were just inspired by founders who are making a way for themselves left and right. (Timestamp: 15:50)

Her confidence in a potential pivot of Backstage Capital also stems from the fact that venture capital has stagnated, as an industry, to invest in underrepresented founders. The investor explained how the industry might lag behind from big deals if they continue to skip over diverse founders. Venture capital, as she sees it, might become less relevant in the future.

Eventually what’s going to happen is what I’ve seen so much of the same way people are leaving San Francisco in droves, they’re going to leave the arena of venture capital in droves. Because so many people have just said I’m done trying to play that game. I’m going to bypass this altogether. I’m going to bootstrap. I’m going to crowdfund. I’m going to go with family offices. And venture capitalists don’t have that same sway and that same importance that they once did. And you may not feel that today, but you’ll feel it soon. And you’re going to be the person who did not invest in Bumble, you’re going to be the person who did not invest in XYZ. So it’s at your own peril that you keep being blind to this in my opinion. (Timestamp: 14:38)

On raising from a community

Since founding Backstage Capital, Hamilton has been clear that she believes the biggest opportunity for investment is underrepresented founders. Today, she talked about her decision to bring others into the process through Republic.

Now let’s be clear: Equity crowdfunding isn’t a new concept, but this year will likely bring some healthy energy to the fundraising technique. It’s because new SEC rules allow companies to now raise $5 million a year through the fundraising channel. Republic is enabling startups and firms to take advantage of these new rules: The platform had more than $150 million in capital deployed across 150 deals in 2020.

In the chat, Hamilton explained why raising from supporters one by one instead of an institutional fund is important to her.

For so many years, we had been beholden to “you need to raise a large fund, and then you need the management fee to pay for your operations, to keep you in business.” And every single year, we found a different way to do that, by necessity. It has been so difficult to raise. And this time, the crowd comes into play. That’s a grand and a great responsibility to have thousands of people who are looking to you, looking for updates and wanting you to win. I wouldn’t have it any other way. I’d much rather have 5,000 people get a few extra bucks every year and be part of this, then to watch one or two institutional [VCs] just get fatter. It’s just not as exciting. So the institutions are going to have to compete with the crowd now. And that is where things get really, really interesting. (Timestamp: 18:09)

You can read the entire transcript here.

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