The Continued Rise of the Micro LP: turning their IRAs into a financial superweapon

It is better to be prepared for an opportunity and not have one than to have an opportunity and not be prepared. — Whitney M. Young

TL;DR: You can now easily make an investment in an alternative asset like real estate, crypto, loans, startups, growth companies, and venture funds like RareBreed Ventures with your Individual Retirement Account or IRA digitally with the help of companies like AltoIRA.

Chapter 1 — Investing in Venture Funds

Limited Partners or LPs are the lifeblood of venture funds. That’s right, they are the ones who invest in venture funds — the same way venture funds invest in startups. In many respects, LPs are at the top of the venture investment food chain. These aren’t investors seeking a steady 5% IRR. They want 5x, 20x, 50x, even 100x return on invested capital. Who doesn’t?!

Actually, LPs usually invest in venture funds as part of a diversified portfolio of investments. Venture itself is a very risky asset class and generally speaking, success for an LP is getting a higher return than they would in the stock market over the same 10-year life span of the fund. Today, a good investor can get 6–8%+ in the stock market. That means for a venture fund to be relatively successful at a minimum they need to outperform that benchmark. Again those who invest in funds do so as part of an overall investment strategy where they typically invest 10–20% of their portfolio into alternative assets, and venture capital is one of those alternative asset verticals.

Historically, access to be an LP in a venture capital fund has been limited to ultra-high net worth (UHNW) individuals, family offices, large foundations, endowments, and other institutional investors.

Chapter 2 — The Rise of the Micro Fund

Over the last 10 years or so we have seen a rise in micro and nano venture funds. (I’m using these terms to describe venture funds of $20 million or less.) The rise in these smaller venture funds has enabled more fund managers to take much smaller checks from LPs. In other words, they could take investments smaller than $100,000, which means a lot more individuals can now make investments directly into funds just like the UHNW big boys. This is the beginning of the rise of the micro LP as coined by Soona Amhaz from Volt Capital.

Chapter 3— The Rise of the Micro LP

With the addition of these LPs who are writing smaller checks, funds ran into the regulatory obstacle that limits the number of accredited investors in a fund to 100. This is really 99 investors as the General Partners running the fund usually make an investment into the fund themselves. Well, on my birthday in 2018 the law was changed to allow up to 250, or really 249, investors into a venture fund as long as it is $10 million or less. This change opened up the potential pool of LPs even more. Now someone can start a nano fund of $2.5 million made up of 250 investors with each putting in $10,000.

Laws impacting LPs recently changed again, this time in a big way. As of October 28 of this year, the SEC expanded the definition of an accredited investor to include those holding certain professional licenses, “knowledgeable employees” of private funds, RIAs, and family offices. These things are working together to allow more people than ever before to participate as LPs in venture funds and the potential returns they can produce. Unfortunately, you still have to be in the right circles to even hear about venture capital funds let alone get the opportunity to invest in one. This is in part due to the fact most funds are raised under a designation of 506(b) that doesn’t allow them to publicly disclose the fact that they are raising capital. So while the potential pool of LPs is larger than ever, you still need to be in the right networks to participate as an investor.

Chapter 4 — The beginnings of the democratization of Micro Fund

Until now! Earlier this year AngelList came out with their latest product the Rolling Fund which I talk quite a bit about in my previous blog post. This new product AngelList offers allows for venture funds to be raised on a quarterly basis, and most importantly, to be raised publicly. With the advent of this new fund model, the idea of raising publicly under what is the 506(c) designation is now becoming normalized and more acceptable. With this, anyone who is deemed to be an accredited investor can become an LP in one of these publicly marketed funds just by clicking on a tweet.

This is an amazing opportunity for so many investors to take part in the venture ecosystem as LPs and give rise to the next generation of great funds and fund managers. But, many individuals who are accredited investors can only make these smaller investments of 10, 5, or even 1 thousand dollars. They might not even feel comfortable pulling that amount of money or more from their bank account.

Chapter 5- IRAs turned in to a digital financial superweapon

Well, thanks to all these new changes, there has been a rise in these micro LPs making investments through their Individual Retirement Account or IRA. Companies like AltoIRA allow individuals to use their retirement funds to invest in alternatives like real estate, crypto, loans, startups, growth companies, and venture funds. There are several benefits to this (such as access to liquidity, duration matching), but the biggest by far is taxes. Investing with retirement funds means you won’t pay taxes on gains (in the case of a traditional account) until you take the money out at retirement, so not only can you invest with pre-tax money, you can also fully reinvest everything you earn back, compounding your wins. If you use a Roth retirement account to invest, your gains are tax-free forever.

Those who want to support venture funds like RareBreed Ventures can now do so with the use of their IRA with the help of AltoIRA. They make it easy for LPs to invest with pre-tax dollars, all online. This, we hope, will democratize the opportunity to participate in venture funds even further and that there is a continued rise in micro LPs. Such a boom will lead to more and diverse funds, fund managers, and funded startups.

For LPs interested in investing in alternative assets out of an IRA, getting started is as simple as:

1. Signing up for a self-directed IRA with Alto
2. Funding that IRA by contributing cash from a bank account and/or transferring funds from another retirement account (whether IRA or a 401k)
3. Investing in the assets you elect, whether that is RareBreed Ventures, any deal listed on AngelList, or your own private deal flow.

Use this referral link for a discount with Alto when you sign up.

If you would like to join the revolution and be an LP in RareBreed Ventures our minimum investment is still 10K for now. If you would like to learn more about RareBreed Ventures and why we started it check out our manifesto — The Search For the Rare Breed Entrepreneur or head over to RareBeed.vc.