Source: Inc.

Redefining Venture Capital With Equity Crowdfunding

Bye, Bye Miss American Pie?

Is the present reinvention of the VC model linked to the deep cultural changes and profound dissatisfaction with the old model? Perhaps. But if it does, then it’s a great time to dust off and play Don McLean’s “American Pie” — for several reasons…

When some of the most prominent VC firms, such as Sequoia, begin to see the urgent need to reinvent the VC industry — the writing is on the wall. After all, over the last 6 decades, the astronomical success of the VCs has become as ubiquitous as apple pie — a symbol of American comfort food, prosperity, and national pride… That is until the crowds arrived…

Oh, These Crowds…

According to Merriam-Webster Dictionary: Crowdfunding is “the practice of obtaining needed funding (as for a new business) by soliciting contributions from a large number of people especially from the online community”.

Crowdfunding.com goes a bit further and explains: “Crowdfunding is a way to raise money for an individual or organization by collecting donations through family, friends, friends of friends, strangers, businesses, and more.

By using social media to spread awareness, people can reach more potential donors than traditional forms of fundraising. Before you start crowdfunding find the best platform for your needs. Compare the best online fundraising platform by fees, features, support, and more”

And over the last decade, some of the well-known fundraising platforms raised a lot of money. To name a few: “Gofundme” raised over $9B, “Kickstarter” raised $3B+, and “Indiegogo” delivered over $1.5B to founders. That is more dry powder than many of the mid-size VC funds sit on…

So, when in 2011 Ryan Feit, the CEO of https://www.seedinvest.com/ “Helped get the Entrepreneur Access to Capital Act, which sought to legalize and democratize online fundraising and investing, passed by the U.S. House of Representatives” — Equity Crowdsourcing was truly born…

And what a decade it was… “This Act was ultimately rolled into the Jumpstart Our Business Startups (JOBS) Act which was signed into law on April 5, 2012, enabling entrepreneurs to leverage the power of the internet to raise capital for their businesses for the first time”.

Equity Crowdfunding Today

According to https://www.seedinvest.com/ “Flash forward a decade, and online fundraising and investing has proliferated in both the U.S. and U.K. markets. In the US, more than 1.2 million investors have invested over $1 billion into more than 4,500 startups, according to Crowdfund Capital Advisors”.

But this was just the tip of an iceberg. As of more recent history, Equity Crowdfunding is all the rage. As https://www.startengine.com/ so eloquently explains:

· “Equity crowdfunding lets startups and private businesses raise capital from the crowd, and it allows everyday people to invest for as little as $100. Everyone can be an investor, not just VCs and private equity firms

· People can invest in startups that they believe in. Equity crowdfunding allows startups and private companies to raise capital from the crowd through the sale of securities like equity, debt, revenue share and more

· Anyone, regardless of wealth, can invest in private businesses, not just the ones trading on stock exchanges, and they can do so online”

· “Equity crowdfunding was created when President Barack Obama signed the Jumpstart Our Business Startups Act (JOBS Act) in 2012, and the Act allows companies to raise money through a few different regulations:

· LEGALIZED IN MAY 2016 — Regulation Crowdfunding allows companies to raise up to $5M each year, every year

· LEGALIZED IN JUNE 2015 Regulation A allows companies to raise up to $75M each year, every year”

· The Background of Startup Investors Is Changing. Traditionally, angel investors, venture capitalists, and accredited investors could invest in private companies and often were the only ones with access to those opportunities.

· Accredited investors are individuals with a networth of greater than $1M (excluding their primary residence) or an annual income exceeding $200K per year for two years ($300K if combined with a spouse). In other words, these opportunities were often limited to the wealthy.

· Now, nearly anyone can invest in startups through equity crowdfunding. Investors have to be at least 18 years old, For More Information…

What Does It All Mean?

For starters, Sand Hill Road will be less traveled. After all, Digitization, IT, and Video calls — made the need for physical contact with a VC office… less necessary. And COVID-19 simply validated such thesis — with great force…

And if a single Equity Crowdfunding platform puts 1M+ of hungry investors in front of the founders — how could the shiny and expensive offices on Sand Hill Road compete? And what about 10MM, or 100MM Crowdsourcing social network platforms of the future?

Consider the following analogy: in similarity to the changes experienced by grid operators, the millions of solar rooftops converted into Virtual Power Plants (VPPs) — deliver a formidable alternative to the pumped hydro and/or centralized peaker plants. And in similarity, millions of angels, and accredited and non-accredited investors, are also forming Virtual Venture Capital pools (VVCs) — collectively…

But this is just the tip of an iceberg… For years, the founders were led to believe that they need to be “introduced” to the GPs by a “trusted” intermediary… Cold calling or unsolicited emailing was not advised, and every respectable VC firm would screen the referrals using the entire army of specially trained gatekeepers…

I wrote about such tunnel vision and inefficiencies in many of my posts, including How To Turn Gatekeepers Into CEO’s Greatest Asset

The evolution of Equity Crowdfunding brings a cure for such snobbery — and it is not at all because someone, somewhere decided to “stick it” to the VC incumbents… Do you still remember the existence of Gentlemen Clubs of Victorian England? Well, they died, too…

Crowdfunding Calendar — What Calendar?

If I only had a dollar for each time I read about how difficult it is to raise funds during the holiday season: from Mid November to Mid January. And the conventional wisdom also states that summers are a bad time to fundraise, too. Start fundraising either in mid-February or mid-August for a successful outcome…

So, if you just stop disturbing the poor VC Partners during the holidays, your probability of success will be much better. And the all mighty GPs might consider writing you a cheque. After all, they all work so hard and DESERVE the 2 months’ holidays…

Well, simply put, the democratization and legalization of online fundraising changed all the above assumptions with one felt swoop. What started in the USA and UK now spread to the entire EU as of Nov 2021…

You may still subscribe to the “Holiday Breaks Passe” if you wish, but Chinese, Japanese, Muslim, and Jewish crowdsourcing investors are all celebrating different calendars and are eager and able to invest 24/7, 365 days a year using Equity Crowdfunding platforms. And they all work as hard as the GPs — but not asking for the 2 months holidays…

The VC Sandwich

And as if all the Equity Crowdfunding pressure from the bottom-up was not enough, the VCs are also facing significant top-down pressures and headwinds from the CVCs and PEs. I wrote about it in: Beware Of The Tight-Squeeze On Mid-Size VCs.

Not only companies like Amazon. Microsoft, Apple, Google, and Facebook sit on more cash than all the VC industry combined — they are also further incentivized and motivated to see the founders as the great adopters of… their own platforms.

Be it Azure by Microsoft, or AWS by Amazon — but do you REALLY think that Amazon acquired Whole Foods only because Jeff Bezos loves organic green onions? No, it is no wonder to me that CVCs are capturing the ever-growing slice of the VC market share…

The sandwich-like squeeze on VCs is real. And to prevent the VCs from being squeezed as hard as grilled panini — they must act now. The sooner, the better…

So What Is The VC Bride To Do?

Well, all dressed up in white and careful not to get her hands dirty, or damage the wedding gown — the VC Bride has a problem. Remember: it is not enough to just “tinker” with the Crowdfunding option — the same way you can’t be just a little bit pregnant…

Instead, consider a slew of viable options adopted by other industries:

· The Lee Iacocca Way

Consider doing what Ford, GM, and VW are doing in the era of the EV revolution. Borough their playbooks and learn. Or as Lee Iacocca used to say:

“Move forward, or move out of the way”…

· The Walmart Way

The company is embracing the Omnichannel concept in addition to enhancing the retail experiences in their stores

· The Healthtech Way

The almighty AI didn’t send the doctors to greener pastures. Instead, AI is now advancing the Healthcare industry — TOGETHER with the medical practitioners

· Launch Your Own Crowdsourcing Platforms

After all, you already have great traction, and it may become attractive to your Limited Partners in more ways than one. In some instances, it will be more cost-effective to the LPs, and I can almost hear the sucking noise of the disappearing 20% Carry — charged by the GPs…

Smart VCs and many Fintech incumbents should simply embrace the Equity Crowdfunding model and adapt to benefit from this new revenue stream. At no time, it will also spread to Investment Banking and Wealth Management — so why fight it?

IMHO, disregarding the Equity Crowdfunding by the VCs is like insisting on manufacturing the horse buggies when the first Model Ts started to roll off Detroit’s production lines in 1908…

And pre-seed funding, in particular, is a great fit for the Equity Crowdfunding model. Such funding already gains enormous prominence by the day… Only a few years ago, most of the investors treated IDEAS as time a dozen. It was all about: show me your TEAM and show me your TRACTION.

Who would have thought that people like Mark Suster from Upfront Ventures, would now openly say: “The bet that we’re making is now more on the founder skills and vision than on customer adoption of a product”. So, I rest my case…

For More Information

Please see my additional posts on Linkedin, Twitter, Medium, and CGE’s website.

AI Boogeyman

You can also find additional info in my book on amazon: “AI Boogeyman — Dispelling Fake News About Job Losses”, and on our YouTube Studio channel… Thank you.

“BODs Serve Investors, Advisory Boards Are CEOs’ Best Friends”

  • Imitation works best in karaoke bars, not in business. To escape the competition, businesses need to constantly reinvent. So, I join Advisory Boards and “unlock” Radical Innovation.
  • Helping the CEOs to escape the competitive floods — is what I do. If product descriptions qualified as IP, Business Development (BD) would have been easy. The problem is that all the competitors can use the same narratives.
  • o amount of branding, marketing, and wordsmithery is going to suffice w/o utilizing BusinessAI™ — the strategies I specifically designed to achieve BD excellence.
  • As a 30-yr BusinessAI™ veteran, I offer unmatched BD investment advice to VCs, PEs, and their portfolio companies. In many cases, I also Propose, Design, Structure, Finance, and Deploy state-of-the-art Joint Ventures to bring RAPID REVENUES — just as I did w/ Verizon already 20-yrs ago…
  • As a founder of Canada Green ESCO Inc. (CGE), I used BusinessAI™ strategies in CleanTech and focused on fighting Climate Change and Environmental Risks — dealing with stranded assets at the largest utilities. In total, CGE raised $1B+ in project finance linked to solar (utility-scale and distributed), wind, geothermal, Waste-To-Energy (WTE), energy efficiency, and more.
  • My pattern recognition abilities allow me to see what is still missing & how to maximize business offerings & profitability. And as a coach & mentor, I bring unparalleled business savvy to separate the wheat from the chaff…
  • What I learned over the years is that it is not just technology innovation that makes all the difference. Business Model Innovation is as disruptive as Technology Innovation and yet I see too many companies focused on pushing their product out the door — while losing ~70% of untapped revenue streams.
  • So, you can call me: “The Midas of Business Development (BD) Innovation™” — as my advice is “worth its weight in gold”…

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I used #AI in #Technology, #Finance, & #Renewable #Energy for 30-yrs. Now, I help #VC/#CVC during due diligence of AI investments & advise their portfolio Cos.

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Oleg Feldgajer

Oleg Feldgajer

I used #AI in #Technology, #Finance, & #Renewable #Energy for 30-yrs. Now, I help #VC/#CVC during due diligence of AI investments & advise their portfolio Cos.

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