By: George Zack
The two major sources that investors consider to raise capital include venture capitalists and crowdfunding (sometimes referred to as crowdsourcing). In terms of funding, the two are at opposite ends of the spectrum.
Venture capitalists typically comply with much stricter regulations compared to crowdfunding. In terms of the type of investors, venture capitalists generally cater to large investors who are accredited, which means that the investor must earn more than $200,000 per year (or have a net worth of over $1 million). On the other hand, any investor can participate in crowdfunding, and contribute as little as $10 dollars toward a venture.
Venture capitalists can only raise funds from those investors with whom they have a pre-existing relationship, whereas crowdfunding is exempt from such fussy requirements. Moreover, venture capitalists cannot publicly invite investors through mediums such as fundraising websites to invest in their ventures, whereas online fundraising is a perfectly permissible and common practice in crowdfunding.
A Catalyst: JOBS Act 2012
The Jumpstart Our Business Startups Act 2012 (JOBS), introduced by the Obama administration, was the first major step toward removing the distinctions between venture capitalists and crowdfunding.
Due to the the Act’s lax regulations, venture capitalists can now easily follow the practices pursued in crowdfunding. It even allows the general advertising of private placements for the first time since the Securities Act of 1933 was implemented, and has removed the investor accreditation requirement for venture capitalists.
The JOBS Act has certainly encouraged venture capitalists to pursue crowdfunding practices. Venture capitalists are no longer limiting themselves to the traditional means of private placements for raising capital. A prominent example of this practice was the announcement in June by 500 Startups – a prolific early-stage venture fund – that it plans to raise $100 million through crowdfunding.
In order to facilitate this public funding venture, Startup 500 partnered with the New York-based online investment platform, Seedinvest.com. The company will use the Seedinvest.com website to attract new investors.
This deal could be a major breakthrough, as other venture funds could soon follow suit, since it is easier to attract a substantial pool of investors from online platforms rather than private placements. Moreover, if venture capitalists opt for this route, the credibility of crowdfunding websites will be established.
Even venture capitalists appear enthusiastic about crowdfunding. Before the JOBS Act 2012, crowdfunding was considered something of a last resort by most investors. In an interesting turn of events, some of those same venture capitalists that so loathed “unprofessional” crowdfunding will be opting in their numbers for the trendy new platform