Crowdfunding for Startups (a normal person's outlook)
Today the “ban” on general solicitation was lifted, enabling startups to publicly advertise that they were fundraising at a certain valuation. It’s the first time this has happened in 80 years, and I can’t help but be optimistic about what this means for early stage companies. It’s weird seeing people like Tim Ferris publicly encouraging people to invest….but it’s the future.
It’s important to note that the general public is still unable to invest (unless you make $200k/yr or have assets over $1 million minus your house…in other words, you need to be an accredited investor.) Next Summer (hopefully), the general public will be able to invest small amounts in a startup of their choosing – it’s going to be interesting, but I have a few high level thoughts/predictions about what’s going to happen, and where I see this crowd-funding movement going.
Multiple Players with Niche Focus
Similar to the rise of crowdfunding sites like Kickstarter, Indiegogo, and GoFundMe, there will be multiple players in startup space as well. I see Angel List dominating Silicon Valley (thanks to their partnerships and familiarity in the startup world + recent war chest of funding), but a massive opportunity to whoever educates and convinces normal people outside of Silicon Valley about this new realm of possibility. This is where the opportunity waits.
The upside in this scenario is that tech-savvy individuals (aka Silicon Valley) are more comfortable making investments online. More on this thought later….
Quality over Quantity
Today I decided to check out startups that were currently seeking investment on Angel List. There’s something like 1000 startups actively searching for funding, which in my opinion is quite a bit of noise. I get the fact that I’m not an accredited investor, but I don’t want to sift and wade through profiles filled with low-quality investment choices – I want to see the best of the best.
Take a look at what Wefunder does – it’s awesome. They’ve spent the extra time to create a beautiful profile for a company; I would consider it a near clone of a Kickstarter profile, but why reinvent the wheel?
I also like Wefunder because it seems like they’ve taken a proactive approach to the quality aspect of their listings. If you start attracting investor interest, you need to pay a small amount. That makes perfect sense. It eliminates freeloaders who consume immense amounts of time, and typically complain the most. These are people that can ruin your business.
There’s no doubt in my mind that there will be dumb money in this new world of crowdfunding. For those who don’t know, dumb money is essentially when someone invests in a company, but does not advise or contribute in any way. For many, raising money is a way to access knowledgable individuals who can help a company succeed (think Mark Cuban on Shark Tank.)
What will separate these platforms is the control over the quality of listings. This is not going to be an easy task, however, I’m sure it can be done. There must be a strict process of vetting potential listings, the integrity of the platform will depend on it.
P.S. – Tim Ferris today invited others to invest in a startup he was excited about using Angel List syndicates…I wonder how much of the $250k that was raised in an hour will be “dumb money?”
That leads me to my next point…
Strength of the Network
For Normal People
Startup investing is much more risky than backing a project on Kickstarter. In fact, it’s highly likely that you won’t ever see a return on your investment. So why invest?
It’s simple – you believe in the founder, and believe they have what it takes to solve a particular problem. For example, if Pistol Lake were to fundraise (and I was able to invest), I would put a small amount of money into the company. I love the clothing, and believe the founders have what it takes to build a successful business.
Likewise, let’s say there’s someone in your community that was starting a business and needed funding. You could help the business grow by shopping at that location, and if they started crowdfunding, the entire community could invest and help the company grow. Sure, problems could arise, but my point is that crowdfunding is not for people with limited knowledge of a startup or it’s founders.
** For Investors**
There’s another angle to this approach that should be discussed as well. In the stock world, everyone knows who Warren Buffett is. Likewise, in the future, people will develop a “crowdfunding reputation”, and the winners will be able to raise a ton of money.
Here’s another Tim Ferriss example: He’s a syndicate on Angel List, and invited others to participate in the funding of Shyp. If this company grows and does well, it makes Tim (and anyone who invests in the companies he’s interested in) look REALLY good. Winners and losers will be picked – it’s risky, but could have huge implications.
Diversification will be Critical
What’s the best way to lose a ton of money? It’s simple – by putting all your eggs in one basket. I see this being a problem when the law is rolled out to all individuals. Many people don’t understand how important diversification really is.
On the other hand, smart individuals will pick and choose a variety of startups from various industries, and invest small amounts into many of them. If one startup fails, your money is gone, but a well diversified portfolio of investments will lower the extreme risk.
I’ll add more of my thoughts to this post as I think of them, but at the end of the day, this is an exciting new world of crowdfunding.