PODCAST: 22x Steering Committee Chris Rawlings on Investing in the Top 30 Silicon Valley Startups
22x is a startup fund that allows angel investors to invest in the top 30 Silicon Valley startup tech companies through one token investment. Head of Steering Committee and Founder of Judolaunch Chris Rawlings talks to James about the elite selection process and what investors can expect.
James West: Chris, thanks for joining me today.
Chris Rawlings: I’m happy to be here, man. This is great.
James West: Chris, I’d like you to outline for me what the Batch 22x ICO is all about.
Chris Rawlings: We essentially put together equity in 30 pre-qualified early-stage tech start-ups, into one vehicle that we issue a token for, a digital token for, that represents equity in all of these start-ups. So we’re basically just simplifying the game of early-stage angel investing, you know, which normally means just means deal flow of hundreds of companies and you have to discern which ones to put money into. We’re pre-qualifying these start ups using 500 Startups, and allowing you to get access to 30 of the top start-ups with one investment.
James West: Okay, that’s pretty simple and straightforward. Now, tell me a bit about what is 500 Startups for those who might not know.
Chris Rawlings: 500 Startups is actually the second-most well funded VC accelerator on the planet. There’s Y Combinator, and then there’s 500 Startups. So it’s an accelerator. For those that don’t know what an accelerator is, it’s a venture capital fund that gives you not just money, but resources, education, and most importantly, a network and community. But this is basically the best of the best. So 500 Startups has a 1.8 percent acceptance rate for the startups it allows into its fund and into its portfolio, which is lower than Oxford, Harvard or Yale or Princeton. So it really is the cream of the crop.
James West: Okay. So you’re offering 5 percent of a selection of 30 companies in the 22nd class of the 500 Startups process?
Chris Rawlings: Right, it’s Batch 22, yep. That’s exactly right.
James West: So as an investor, I would want to know: what is the performance of the other 21 batches of 500 Startups, in terms of where they’re at today.
Chris Rawlings: So would I! That’s the first question I would ask myself as well. And the answer is, so what wouldn’t make sense as an answer is to just take a simple average or median, because the whole game with early-stage angel tech investing is sort of, put crudely, the spray and pray model, where you’re taking as many quality deals as possible and getting exposure to as many quality companies as possible, fully knowing and expecting that 90 percent of them will fail.
So we could take the batch that Trulioo was in, for instance, 500 was the first money in for Trulioo, the API for messaging marketing, and you know, that company’s value is now in the billions, and it’s IPO’ed. So it would be, you know, an insane payout. You can take the batch that Makerbot was in, which got acquired in the high hundreds of millions. Again, the return on that, gosh, would be insane.
So this isn’t a fund where you put funds in and then we discern where, how to allocate them, and you have to trust us to make a decision; it’s actually complete transparency. So anybody that decides to invest in the fund, they can look into the companies themselves. They can say, okay, this batch has the top, for instance, the top motorcycle community app in the world, with half a million users and deals with top motorcycle manufacturers. Or, they can say, you know, they have the company that is owning the space for Blockchain data compliance for banks, which is called Ohalo. Or any number of other big winners that are already succeeding immensely in the batch, they could do their own due diligence.
So it’s the first time you can have complete transparency; there’s no trust involved.
James West: Right, okay. Another question, then: how much money does the 500 Startups put into an entire batch?
Chris Rawlings: So 500, they invest $150,000 in each company, and a batch can be anywhere between 25 and 40, I believe the top was above 40, the most point. Yeah, so it’s $150,000 per company, across between 25 and 40 companies.
James West: Okay. And what percentage of those companies does $150,000 get them, typically?
Chris Rawlings: So they do it, it’s not a price round, it’s a convertible note. But it converts at, it’s a fixed percentage. It converts at a fixed percent, whatever your next round happens to be, no matter how big or small it is.
James West: Oh, okay. So I see. So in that context, we finally managed to get to the answer of my question: one out of the batch generally makes up for all of the rest of them rather handsomely.
Chris Rawlings: Right. That’s exactly right; I mean, that’s typically how it works with angel investing.
James West: Sure.
Chris Rawlings: I mean, every angel expects that. You know, they’re expecting 90 percent of their portfolio to either stagnate or fail, and it’s that one Uber that pays off the whole set and just, you know, allows them to get their handsome return.
James West: Yeah, right. You had to say Uber. Boy, was that one of 500 Startups?
Chris Rawlings: No, it was not. I shouldn’t have said Uber. I should have said Trulioo.
James West: Sure. Okay, so then, in terms of investing in an ICO, as a, let’s say I’m not a high net worth accredited investor, I’m a retail investor. Is my ability to invest in this ICO, or is the recommendability [sic] of investing in this ICO, going to be governed in any way, shape or form by the influence of the Securities Exchange Commission of the United States?
Chris Rawlings: Oh yes. In many ways. Actually, James, this has been an insane experience for me, because I had to basically become an expert on securities laws, and the rest of the steering committee, because this was actually a founder-led action. So it was led by the founders in Batch 22; I’m one of the founders, my company is called Judolaunch.
James West: Right.
Chris Rawlings: So we had to become securities experts, and of course we brought on the top securities lawyers and fund administrator who has the background in securities issuings and offerings. But yeah, so we had to comply with the Securities Act, with the Investment Company Act, and basically how ours is structured, and this might mean something to a subset of your audience, we have a Reg D 506-C offering for US citizens, and Reg S offering for non-US citizens.
So that basically means that unlike a public offering, like an IPO, we can’t have an unlimited number of investors in the US – it’s actually limited to 99 investors under a net worth of 5 million liquid. Those have to be accredited. And we have a limit of 499 investors over a liquid net worth of 5 million.
So that’s how it’s structured when you do a private offering to US citizens. Otherwise you have to essentially go public, and the only other way, and this might be interesting to some of your audience because of the fact that it’s looking like it’s possible that the SEC might sometime make all ICOs securities, so this is actually very relevant right now – there’s another way to do it that’s called a Reg A+ offering. And this is a new type of structure that just came out based on a new law that was passed just a couple of years ago called the Jobs Act.
This allows you to raise up to 50 million from anyone, investments can be of any size, and you can have an unlimited number of investors. It just takes a little bit more paperwork; you need to have actually direct contact with the SEC to get approval to do an offering like this.
James West: A scary proposition in its own right.
Chris Rawlings: Exactly. It’s not just a form you fill out, you have to talk to them. So that’s really – I think most people in our community just want to run away as fast as they possibly can from the SEC.
James West: Yeah. Avoiding a conversation with the SEC throughout your entire life is not a bad ambition. We actually had an A+ graduate that listed on the NYSE called Level Brands, and they were our guests last week.
Chris Rawlings: Oh, cool.
James West: So our listeners are somewhat commensurate with the process, and it sounds like there’s a career for you in securities law if Judolaunch or 22x doesn’t work out for you, by the sounds of things! You certainly seem to have absorbed it.
Chris Rawlings: Pretty much. Yeah, seriously.
James West: Okay. So the SEC has then just deemed this ICO as a security, but you’re in full compliance and in fact, probably a little bit wiser for the experience?
Chris Rawlings: Yeah, we’ve been totally proactive. We weren’t waiting for them to crack down on us; we decided not only have we done our own research and our counsel has done our own research, but we also have partners who, you know, are directly communicating with the SEC to make sure that we’re not missing a step throughout the entire process.
James West: Fantastic. So as a Canadian accredited investor up north here, how do I purchase one of your coins?
Chris Rawlings: You basically contact us by filling out a form on our website, which is 22xfunds.com, and you just fill out that form and that will direct your information to us. Because this is actually technically a security, the purchase will go through our platform, but you’ll have a dialogue with our fund administrator.
James West: Okay, fantastic, Chris. Well, that’s a great overview. I’m going to come back to you in oh, I don’t know, a quarter’s time or so and see if you’ve become a securities attorney or you’re still with the 22x program. Thank you so much for your time today.
Chris Rawlings: For sure, man. Thank you. It was great being on.
James West: You bet. Bye for now.
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