Venture Capitalists Prepare For The Impact Of Crowdfunding(washingtonpost.com)
washingtonpost.com
Venture Capitalists Prepare For The Impact Of Crowdfunding
http://www.washingtonpost.com/business/capitalbusiness/venture-capitalists-prepare-for-the-impact-of-crowdfunding/2013/02/22/7e8682d8-7c4e-11e2-a044-676856536b40_story.html
4 comments
Why do you think crowdfunding is more efficient than VC? The liquidation preference might be lower but you're also not getting any advice or connections and there could be a significant investor relations time sink. If I had a choice between VC and crowdfunding I would take the VC in a second. I would look at crowdfunding if every VC passed, but that essentially makes it a sucker's market.
There should be other ways to leverage connections/network other than having to dilute ownership. That may be the most imbalanced transaction around.
I also reject that things like electronic trading for the masses are bad because the general public has bad investors. That's like saying online fraud should determine my access to ecommerce.
In many ways, platforms will help validate concepts through user participation... And the community can validate credibility. I don't just think this is a dumb money thing, I think investors will have advantages they've also never had. The bottom line is both sides of the market will get a clear benefit.
I also reject that things like electronic trading for the masses are bad because the general public has bad investors. That's like saying online fraud should determine my access to ecommerce.
In many ways, platforms will help validate concepts through user participation... And the community can validate credibility. I don't just think this is a dumb money thing, I think investors will have advantages they've also never had. The bottom line is both sides of the market will get a clear benefit.
Efficient here may simply mean efficient in the economic sense. As in, there may be a lot of pent up money to invest in this stuff, but not enough deals. At least, that's what investors keep telling me. Efficient would mean that supply equals demand, and this would be a mechanism to make that happen.
edit: Also, on top of not enough deals, investors don't normally easily get access. In the past, this was for the investor's protection, of course. Theoretically, this would also solve that inefficiency. Again, in the past, this inefficiency existed for the investor's protection, not a bad thing.
edit: Also, on top of not enough deals, investors don't normally easily get access. In the past, this was for the investor's protection, of course. Theoretically, this would also solve that inefficiency. Again, in the past, this inefficiency existed for the investor's protection, not a bad thing.
Firstly, that is not what "efficient" means in the economic sense. Efficiency deals with prices (lowest costs, price = marginal cost). Yes, supply and demand affects prices. But supply and demand in of itself does not deal with efficiency.
I would also say it's a stretch to call this "pent up money." Equity crowdfunding is merely an alternative outlet for your money (the usual outlets being currency, bonds, public equities, etc.). You can think of in terms of substitute goods.
Not to mention that most people have absolutely no business investing in startups. All the best deals are going to go to the established, connected VCs and angel investors who can add value in addition to the money invested.
I would also say it's a stretch to call this "pent up money." Equity crowdfunding is merely an alternative outlet for your money (the usual outlets being currency, bonds, public equities, etc.). You can think of in terms of substitute goods.
Not to mention that most people have absolutely no business investing in startups. All the best deals are going to go to the established, connected VCs and angel investors who can add value in addition to the money invested.
Hm. Advice and connections can undoubtedly be valuable, and VCs presently provide them (and/or try and/or pretend to), but does that in any way represent efficiency in the market for capital?
Crowdfunding might be more or less efficient than VC. But more competition/options in the funding space should help make the space more efficient overall.
Having a top-tier VC invest in you is an outside signal of credibility in recruiting, PR, marketing, and other areas. VCs who are competing for the best deals are creating new methods of adding value outside of "just a check." This can't be replaced by crowdfunding, at least not soon.
Alternatively, take a look at a lot of the hardware/product projects on Kickstarter. Those startups are using Kickstarter as a platform to show their idea is wanted and credible. So then the VCs who passed on the risky venture come in later after the idea is validated to a certain extent. They might not see the same upside but they're also taking on less risk.
Alternatively, take a look at a lot of the hardware/product projects on Kickstarter. Those startups are using Kickstarter as a platform to show their idea is wanted and credible. So then the VCs who passed on the risky venture come in later after the idea is validated to a certain extent. They might not see the same upside but they're also taking on less risk.
I think many people over look the value of the network you get via the VC. Start ups look to much at the money and not at the outside benefits of getting plugged into a particular network. It is hard to believe that crowdfunding for equity is going to really enable this same network effect.
I really don't like that headline.. the subject of the article is not crowdfunding, it's equity based crowdfunding. There's a significant difference.
I don't like use of the term "crowdfunding" to mean charity drives or group buying. Those already have perfectly good phrases to refer to them. Crowdfunding, that is, initial equity funding of a company by a large number of small shareholders, does not have any other handy linguistic handle, and it is the term used in the US law that this article is talking about.
TITLE III—CROWDFUNDING SEC. 301. SHORT TITLE. This title may be cited as the ‘‘Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012’’ or the ‘‘CROWDFUND Act’’.
TITLE III—CROWDFUNDING SEC. 301. SHORT TITLE. This title may be cited as the ‘‘Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012’’ or the ‘‘CROWDFUND Act’’.
I've said it before, and I'll say it again - equity based crowd funding is a bad idea. It's a bad idea, just like easy e-trading was and still is a bad idea back in the late 90's for the average investor.
You know why?
Normal people suck at investing. Period. They just aren't equipped to make good investment decisions - they can barely handle regulated housing/stocks/bonds. The average investor isn't trained in the most basic aspects of finance, isn't qualified to determine the merit for an arbitrary startup, often has a day job that is in a completely separate industry and is just fodder for pump and dump, pyramid schemes and scammers.
Professionals aren't that much better - but that's a whole another discussion (and they're playing with OPM).
This is just setting up bubble 2.0. It also reminds me of another odd thing we have with investing. There's no minimum qualification or licensing needed to become an investor. Odd - seeing as someone investing their live savings as an individual is quite literally playing with what is in effect a life-time's worth of money.
Now - I'm not against pre-orders for products/experiences - a la kickstarter - which I think are absolutely brilliant, and other stuff that is seen as pure consumption (not investment).
What I'm against is what stuff like this will lead to. It's the people investing in Social Media Startup No. 3015 with $5 million in life savings at a $25 million post valuation in 2016.
That's what's worrying.
You know why?
Normal people suck at investing. Period. They just aren't equipped to make good investment decisions - they can barely handle regulated housing/stocks/bonds. The average investor isn't trained in the most basic aspects of finance, isn't qualified to determine the merit for an arbitrary startup, often has a day job that is in a completely separate industry and is just fodder for pump and dump, pyramid schemes and scammers.
Professionals aren't that much better - but that's a whole another discussion (and they're playing with OPM).
This is just setting up bubble 2.0. It also reminds me of another odd thing we have with investing. There's no minimum qualification or licensing needed to become an investor. Odd - seeing as someone investing their live savings as an individual is quite literally playing with what is in effect a life-time's worth of money.
Now - I'm not against pre-orders for products/experiences - a la kickstarter - which I think are absolutely brilliant, and other stuff that is seen as pure consumption (not investment).
What I'm against is what stuff like this will lead to. It's the people investing in Social Media Startup No. 3015 with $5 million in life savings at a $25 million post valuation in 2016.
That's what's worrying.
10 years from now, few people will seek 'traditional' financing suppliers as capital is about to get real efficient real quick. Bottom line is, this will be excellent for businesses of all shapes and sizes.