Velvet Launches Fund-to-Fund Investment Marketplace
While most 17 year-olds work at the mall or a fast food restaurant for extra cash, Andrew Pignanelli traded stocks. He remembers one particular day, a teacher took his phone from him in class. He had $10,000 on the line.
Pignanelli became well acquainted with the private investment space and was a part of online communities dedicated to funding and investments. While still in high school, he noticed a recurring need to bridge the gap between small private funds and investors.
“Over the years, I figured out that the people who knew what they were doing usually ran some sort of small fund with their money or family money,” says Pignanelli. “They kept coming to this problem, they’d say ‘I need to raise more money for this fund. I want to raise a couple million dollars to trade with, but it's difficult to do because I'm not out of Harvard or on Wall Street, even though I’m really trading.’”
Pignanelli decided to research the problem and found that it’s illegal for a private investment fund to publicly post their returns or their strategies online.
“Like any other business, they need to market themselves, but they can’t do it like any other business,” says Pignanelli.
After more research, he found a regulation from the JOBS Act of 2013, stating that if everyone on one side of the market is accredited investors, they can market their fund, as long as it doesn’t go to the general public.
“What if we had a closed off marketplace, one side with accredited investors and funds on the other side?” thought Pignanelli.
This idea sparked the first draft of Velvet. In fact, Pignanelli wrote Velvet’s first pitch deck while still in high school.
Velvet is a Salt Lake City-based B2B (fund-to-fund) marketplace that helps facilitate deals between investor institutions and private funds. Because it’s a private marketplace, Velvet allows private funds to market their strategies and returns to large groups of investors.
TechBuzz sat down with the founders, Pignanelli, Battistone and Johnson to find out the story of the company and to learn about their vision.
In 2019, as a freshman at University of Utah, Pignanelli met co-founder Nate Battistone. During their first semester of college, Pignanelli and Battistone raised $110,000 from family and friends, bought and moved to a startup house, and started Velvet. Six months later Pignanelli met Alex Johnson, who became Co-founder and the CRO of Velvet.
During the pandemic, the founders spent their time on research, software development, and outreach to beta users. They launched a beta version of the Velvet marketplace in April 2022 and began in earnest gathering feedback from beta testers to refine the product direction and feature set.
“Neither of us knew anything about private funds when we started,” says Pignanelli. “We just figured it out. We knew what private funds were, but we didn’t know how the space behaved. We are now very well versed in this space. It’s reassuring to know that people can learn as much as we have purely on their own objectives.”
The team landed on a business model whereby they charge a straight commission fee for each participating fund rather than a percentage fee of funds raised. This kind of payment plan requires a broker-dealer license, a process that can take up to a year, according to Velvet’s founders.
"Velvet's model is to automate the fundraising process for fund managers so that they spend time running their funds instead of raising capital. On the other end, Velvet automates the diligence process for investors by offering the managers a layer of trust and data," says Pignanelli.
Discouraged by the time constraint, Pignanelli and Johnson decided to go through with the broker-dealer license, while at the same time raising more money from angels, family, and friends while waiting. During this time, Velvet’s public operations were put on hold. They anticipated the license would come through in the middle of 2021.
Velvet’s subsidiary company, Decheque Securities LLC, obtained the broker-dealer license in September 2021 and quickly started gathering allocators and private funds to participate in the launch. Velvet officially launched the funds side of its business on January 21, 2022 with a gala at their new downtown offices and a ski weekend at Snowbird. It plans to launch a sister-enterprise, the limited partner (LP) side of its business, later this month.
“Over the course of the last few years, we've pivoted a little,” says Pignanelli. “Initially we wanted Velvet to be individuals looking at private funds, but now it's more of a B2B marketplace. We’ve gone from a consumer facing model to a business facing model with funds raising money from large investment institutions.”
Johnson adds, “Now, the kind of people we work with operate at the highest level of finance. So we're not even working with founders. We work at the level above founders, in private finance. The most hidden away, emerging managers and funds that are looking for large institutional checks go through Velvet.”
Besides this pivot, Velvet has also focused on data, using fund data to help people make investment decisions on funds. Currently Velvet works with 86 funds and 50 institutional investors (family officers, fund of funds, high net worth individuals or HNWs). They also have 34 more funds in the pipeline.
“We have a tremendous amount of depth on this data and a tremendous amount of analysis we plan to do this year,” says Pignanelli. “Over time we will have a number of funds with this depth of data and that gives us the ability to analyze it and look for different trends and things like that. We want to use the incentives that a marketplace model provides to collect this data set on funds and use that to help them raise money.”
Pignanelli and team plans to ramp up to 60 funds per quarter. Velvet hopes to decrease the time it takes for allocators to invest in funds and create a more efficient private market.
“Venture funds in Utah have really picked up speed but people don't realize that a lot of the value is very hard to find,” says Pignanelli. “It's very relationship based. If we can remove a lot of the burden off of the relationship, allow these strategies to be seen in a scalable way, and remain up to date on the data, the markets respond well and allocations happen more.”
“We want to help give access to private finance through fund managers, cause they are doing incredible things,” says Johnson. “They have incredible returns, but nobody knows how to find fund managers – nobody normal at least. Even at the base accredited line, they don’t have a lot of access, especially to emerging managers, because nobody is standardizing them. Velvet’s vision is to use data and AI to standardize investing with emerging managers. Nobody else has done that.”