ARLAN HAMILTON: Crowdfunding Villain or Hero?

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ARLAN HAMILTON: ON A MISSION

In 2021, one name was popping up all over the crowdfunding space: Arlan Hamilton.

She had a mission that was clear as a Windex’d storefront: allocate capital to underrepresented founders, particularly non-white and LGBT+.

Arlan herself is a gay, black woman - she’s experienced firsthand fundraising as a member of those demographics.

According to Arlan’s LinkedIn page, she began her career in music by working on production for a number of musical tours.

Around 2015, financial struggles hit Arlan and she claimed to have spent several nights homeless & sleeping in the San Francisco airport.

It’s at this point that Arlan began setting up BackStage Capital, the venture capital firm she would use to funnel money to underrepresented founders.

Backstage Capital has successfully deployed tens of millions of dollars into 200+ startups, but it’s been a bumpy ride.

This month Arlan announced that she’s taken a step back from the day-to-day operations of Backstage Capital. While proponents have expressed excitement at the journey ahead, critics are taking this moment to call her out on bad intent & grifting.

BACKSTAGE CAPITAL PARTNERS WITH RETAIL INVESTORS

Let’s go back to the beginning of BackStage Capital (BSC).

Arlan first catapulted onto the scene by announcing that she and Backstage Capital would be raising a $36M fund. On top of that, she would be letting retail investors take part in BackStage Capital via an equity crowdfunding deal on Republic.

The crowdfunding round was enormously successful by crowdfunding standards, raising $4.72M from 6,749 investors. 

What investors received in return was rather…confusing:

Even for more experienced investors this diagram can make your head spin.

I’ll try to break it down in ye olde English for those of you that don’t have quantum supercomputers in your noggins.

By investing in BackStage Capital, you would receive payouts from two different sources:

1. 2.5% Carried Interest - this means you get 2.5% of any profits generated by BackStage Capital’s investments. If BSC invests $36M into startups and make a return of $10M, $250,000 would be split among the investors ($10M x 2.5%)

2. 10% of Management Fees - VC firms often charge a 2% annual fee for the money they manage. So let’s imagine that Arlan is able to raise $36M from LPs (people that fund VC firms). Over three years, BackStage Capital would charge the LP’s (2% x $36M x 3 years) = $2.16M. Crowdfunding investors are entitled to 10% of that number, so over three years they would theoretically split up the $216K.

Right off the bat, the math isn’t really working → retail investors invested $4.7M but are fighting over a share of ~$466,000 if you combine the two hypothetical scenarios above.

But here is the bet that investors are making - BackStage Capital has plans to launch numerous funds, not just this 1st fund where they targeted $36M.

If they are successful in convincing LP’s to invest in their funds, the total Assets Under Management (AUM) will grow - lifting the management fees and potential carried interest.

It would take a lot, and likely a long time, but that’s the investment thesis here.

MISSED TARGETS AND POOR EXECUTION

So, BackStage Capital successfully raises from $4.7M from retail investors (to cover operational costs, not to invest) and goes out to raise $36M from LPs.

The final numbers are not public, but BackStage fell short of raising the $36M. 

Piecing together comments made to an interview with Inc, it seems like Arlan was able to raise ~$25M. This is actually pretty impressive in itself, but disappointing given the goal they had touted to retail investors.

The real head-scratching moment came on the operations side of things.

Arlan assembled a team of 12 people to lead BackStage Capital - some traditional VCs were bewildered as this far exceeds the expected number of employees given the size of the fund.

I’m no expert in VC team structure, but those with experience weighing in online remarked that a $25M fund would require 2-3 people.

Out of necessity, Arlan was forced to conduct layoffs. In total 9 people were sent to LinkedIn to find their next employment opportunity.

BackStage Capital was in a precarious position - Arlan revealed that the investor funds from their crowdfunding campaign were fully utilized in the 1st three years of the firm’s operation.

If traditional VC’s were previously scratching their heads, now they were ripping out their hair.

VC Firms mostly fund operations from a 2% annual management fee. For a $25M fund, this would have equated to a budget of $1.5M over 3 years ($25M x 2% x 3 years).

Arlan’s team burned through more than triple that within that timeframe.

While BackStage ripped through ~$1.6M/year, several VCs chimed in with their own experiences

• Alex Cohen claimed to have raised $10M across two funds and never exceeded $160K in annual expenses

• Zach Ware of VTF Capital remarked about running a $48M fund with just $380K in annual expenses

It should be noted that the entirety of the $4.7M raised from retail would not have ended up going towards operations - Republic would have taken a single-digit fee and a portion was slated to repay debts (some of which were to Arlan herself).

When accounting for this, the difference isn’t as bad, but still very high.

WHERE’S THE MONEY GOING?

Obfuscating the picture is the corporate structure of BackStage Capital.

After raising from retail investors, BSC soon wired all funds to a related corporate entity named BackStage Umbrella LLC.

We’re unable to get any insight into how the crowdfunding money was spent so quickly, as BackStage Umbrella LLC is shrouded from public reporting.

• Haters will say it’s to hide shady spending, such as promoting Arlan’s book tour or potentially exorbitant salaries.

• Proponents of BSC would likely say that this was a necessary legal structure since mixing non-accredited investors with venture capital is complicated.

One thing we do know is that Arlan used funds from BSC to invest in her other companies: Hire Runner and Yacht Water.

ARLAN’S OTHER COMPANIES

There’s some interesting things going on with both of these companies.

Hire Runner raised on a $25M valuation and secured $383,000 from retail investors on Republic.

Their app-only service pairs talent with employers - it’s hard to get a sense of traction but on the app store they only have 1 review. From the outside looking in, there’s not much going on there.

Nestled into the Form C, is that a minimum 30% of Hire Runner’s raise would go towards repaying a $1.5M debt to OpenDeal Inc.

It took some digging, but I learned that OpenDeal was the former name of Republic - the platform Arlan raised capital on.

This sets up a complicated web of money transfer that leaves me a bit puzzled.

Republic loans Hire Runner money → Hire Runner raises money on Republic → Raised funds are used to repay Republic

It’s a bit suspect, I’ll let you draw your own conclusions to avoid speculation.

Then there’s Yacht Water.

Arlan announced the launch of her own still/sparkling water brand, named Yacht Water.

A couple of glamorous mock-ups and boom: $231K raised on Wefunder.

This one has some time to play out, but I noticed a couple of red flags that have me questioning its potential.

1. In an IG post, Yacht Water intended for the 1st shipment to go out in summer of 2024. As we head into 2025, I could not find any evidence that the product was being sold. (I reached out to Yacht Water but did not receive a response)

2. Yacht Water is not even included in Arlan’s Twitter bio, where she is an active user and mentions her other companies

3. Yacht Water does not even have a website, YachtWater.com simply redirects to their Wefunder page.

The cynic in me is asking - did she just raise a couple hundred thousand dollars off of a couple of digital mockups?

There’s time for this one to play out, so I’ll refrain from commenting further.

ARLAN: HERO OR VILLAIN

There’s evidence to support both notions - that Arlan is a great, mission-driven entrepreneur who has made a few mistakes - and that Arlan is using retail investors to fill her own pockets. 

Despite some of the oddities above, Arlan has funded 200+ founders. She successfully raised ~$25M. And she’s even funded scholarships at Dillard University, a historically black university in New Orleans. A couple founders have publicly supported Arlan, commenting on their positive experiences with her.

While I haven’t participated in any of her investments, I find myself in the middle; cautious of her dealings, but not in the camp that she’s a fraud/self-serving.

And very much open to the idea that she actually is a good person trying to have a positive impact on this world.

As BackStage Capital, Hire Runner, and Yacht Water progress in the next couple of years, we’ll get a clearer image of the real Arlan Hamilton. 

I usually get a few responses with new information when I make deep-dive posts like this - so hit reply if you have anything to share!

Arlan was reached out to for comment, but did not respond.