Allocations sees a world where myriad, smaller private equity funds are the norm

This morning Allocations, a fintech startup building software to help smaller private equity funds form and operate, announced that it has raised a $4 million round at a $100 million valuation.

The startup also shared a host of performance metrics, including that it reached a $4.6 million revenue run rate in June, and a $6 million bookings run rate in the same month.

Allocations also told TechCrunch that it has posted 28% monthly revenue growth over the last 12 months. With metrics like that, our curiosity was piqued. What is Allocations building that is attracting so much early demand? And how does the company’s thesis regarding the future of private equity funds intersect with micro-venture funds themselves?

What Allocations does

Born from CEO Kingsley Advani’s efforts in building a community of angel investors, and the issues that he ran into spinning up special purpose vehicles (SPVs), Allocations started off as software built to scratch its founder’s itch. SPVs are an increasingly common way to raise capital for a single investment from pooled sources, and in today’s rapid-fire venture capital market, Advani had to race to get capital into deals before they closed.

As with many technology startups, Allocations is software designed to solve a known pain point. The old way of putting together SPVs just didn’t match the expected pace at which private investors are expected to commit to investing.

Today the startup’s software helps its users to create new SPVs and funds more quickly, also helping investors manage capital calls and the like after their fund is formed. The startup charges either one-time (in the case of an SPV, by definition a single-shot investment), or recurring fees (multi-asset SPVs and funds). A 30-investment fund will cost its managers $15,000 per year through Allocations.

But how many funds are there for the startup to support? Is there enough market to allow Allocations to become a large enterprise itself? So far, the company has attracted some 300 funds to its roster. And Advani thinks that there will be plenty of demand. In an interview with TechCrunch, the founder noted that present-day denizens of major funds locked out of material carry — venture economic upside, more simply — can peel off and start their own fund, allowing them much better economics. That dynamic could spur demand for his startup’s services.

And Advani said that family offices and other major capital pools that once fought for allocation into brand-name venture capital funds and other private equity vehicles — venture capital is a subset of private equity — are increasingly chasing smaller funds that may post better returns than larger investing partnerships can manage. This is the law of large numbers in reverse; it’s easier to 10x a $10 million fund than a $10 billion vehicle.

And Advani expects his customers will put together multiple funds. Per the CEO, the goal of new fund managers is to get to their second fund. So, new managers often invest their first fund quickly in hope of reaching their second more quickly — more funds means more fees for Allocations.

In the startup’s view, the market will see many more small-scale private equity funds in time, perhaps smaller than $10 million in capital. This perspective mirrors what TechCrunch has seen in the market lately, with rolling funds rising to prominence in the early-stage startup investing, and solo GPs putting together what feels like more micro-funds than ever.

Allocations fits into the larger trend of fintech startups taking antiquated models in the world of money and making them faster, more modern, and often lower cost. Sure, there’s miles of distance between Allocations and Robinhood, but as both are about smaller investors, democratization of investing access, and using tech to tear down old walls, they are more brethren than different species.

Update: It’s a $4 million round, not $5 million. Post has been corrected.

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