Why VCs Do Not Like Equity Crowdfunding

By  Executive Chairman and co-founder at StartEngine Crowdfunding CrowdFund Beat Guest Post,

In April 2012, President Obama signed the JOBS Act and announced that Americans will now have access to the capital they need from ordinary investors. Yet the media received the declaration quietly — meaning most U.S. citizens remained blissfully unaware of this revolutionary new regulation.

The venture capital industry is probably one of the most vital sources of risk capital for our economy. It has produced the industry giants that command worldwide success: Google, Apple, Microsoft, etc. Without VC, most of those businesses would have never existed. Moreover, VCs have significantly contributed to our country’s technological success. Most people are not aware that the No. 1 export in the U.S. is the sale of intellectual property (think software, hardware, and movies).

dailystartup_D_20090806101628-1-250x174-1-225x174

 

 

 

 

 

 

In 2015, VCs invested nearly $60 billion in capital. At face value, that number is impressive, but when you realize that about 600,000 new businesses are started each year in the U.S., you see that, distributed evenly, each company would only receive about $100.

Granted, VCs invest in less than 1 percent of the companies formed in the United States — with the bulk of that money going to a few hundred companies that are likely located in Silicon Valley, Los Angeles, and New York. It is not surprising: These communities are rich in educated, experienced, and talented entrepreneurs. However, focusing on these communities fails to represent half of the American demographic, which lives between the coasts and is racially diversified.

For example, less than 3 percent of VC-funded businesses have a woman CEO, and 85 percent of all VC-funded companies do not have any women on their executive teams. What’s more, scarcely 1 percent of VC-funded businesses have black founders. In comparison, nearly 90 percent of VC-supported founders are white, and 83 percent of all founding teams are comprised entirely of Caucasian people. Finally, most entrepreneurs who receive capital graduate from a select pool of universities. 

Are you starting to get the idea?

startup

Startup

Let’s go back to the JOBS Act. It promises to offer entrepreneurs the ability to receive capital from ordinary people. The VCs have privately dissed this new regulation, believing that ordinary people are not investment savvy and will lose their money if offered the opportunity to invest directly into companies.

True, most everyday consumers are not experienced financial wizards. They like to purchase goods and services. So far, they have not invested in startups because, well, they could not. They did read the success stories of early investors who were insightful enough to invest into Facebook and Uber, but they all knew that they were not members of that club — nor would they be invited to join anytime soon.

But sometimes, technology has the ability to disrupt markets on its own. Think of Uber offering a more convenient, cost-effective, and clean ride. Think of Airbnb offering the ability to monetize someone’s unused bedroom or apartment. These companies enter markets, offer new services, and disrupt the incumbents for the better. 

These technologies were fueled by the money from the VCs. And while they laughed all the way to the bank, they still think they’re the only ones who should be allowed to participate in where most of the value is created.

This time it is different. The JOBS Act is allowing ordinary people to challenge the status quo. How awful to think the VC’s position as the exclusive source of capital is being disrupted. Is it ironic that technology will eat its own creator? The JOBS Act has created the new monster: equity crowdfunding.

For those generous people who donated money on Kickstarter or Indiegogo, they understand that the crowd has a voice and a certain wisdom — that je ne sais quoi. Can these crowds of ordinary people be sometimes right on a company idea? The answer is yet to be determined, but the capital revolution started on June 19, 2015, when several new equity crowdfunding platforms were launched and started to pour capital into startups. 

Can you blame VCs for feeling a little disrupted? Are they able to see the wrath of disruption that has blinded so many industries that realized too late that someone ate their cheese? 

You be the judge, but we are seeing a new opportunity to offer a larger group of entrepreneurs the ability to get the capital they need without bias. The real skill entrepreneurs need is to convince a few thousand people out of 250 million that their startups are worthy of existence. Marketing is the new equalizer. After all, if thousands want to invest, maybe tens of thousands want what this new startup is offering. 

VCs still have their critical role to play and will help to build our new economy; however, there is a new kid in town, and his name is the crowd. Let the crowd decide who gets to be the next Zuckerberg and anoint new billionaires. This crowd will now participate in the story and use its gains to hopefully fuel many thousands more and create even more jobs for our economy.

Yes, the middle class can decide how it will enrich itself and offer a more equitable distribution of wealth and protect the values we so much love.

Tags: , , , , , , , , , , , ,

HEADLINE NEWS

How Equity Crowdfunding is Different Than Buying StocksMotley FoolIn this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis interviews Indiegogo founder Slava Rubin and MicroVentures founder Bill Clark -- about how investing in equity crowdfunding deals is different than [...]

Fast CompanyCan crowdfunding save DIY music spaces post-Ghost Ship?Fast CompanyBrooklyn's Shea Stadium needs some cash. The eight-year-old underground music venue took to Kickstarter today to raise money for the renovations and local permits it needs to reopen as a legally legit [...]

VentureBeatFundThis creates a 'risk free' crowdfunding platformVentureBeatFundThis is launching a new “risk-free” crowdfunding platform to enable creators to raise money for new projects, ranging from fashion ideas to tech projects. The Boca Raton, Fla.-based company is also [...]

Crowdfunding: Alternative source for SMEs financingVanguardIn Nigeria, there are no known laws that guide crowdfunding unlike in U.S, Canada, Turkey, United Kingdom and elsewhere in Europe where the practice is heavily guided by legislation. Though crowdfunding is yet to be fully embr [...]

Business InsiderRevolut crowdfunding £4 million on Seedrs, launching Premium ...Business InsiderLONDON — Fast-growing fintech startup Revolut has announced plans to raise £4 million through crowdfunding at some point later this year, using the ...App bank Revolut launches £4m equity c [...]

Lexology (registration)Crowdfunding - UpdateLexology (registration)Since 1 February 2017 Crowdfunding finally has a legal framework, so, from now on, crowdfunding platforms must obtain permission from the FSMA. The Act of 18 December 2016 (hereinafter "The Act") regulating t [...]

DeadlineFan-Owned Legion M Launches New Crowdfunding Round | DeadlineDeadlineLegion M, which has had a hand in movies like the upcoming Colossal, has been approved to begin a Regulation A+ round of equity crowdfunding.Fan Funded Entertainment: Legion M Launches Qualified Reg A+ ...Cro [...]

Eater SeattleBlack and Tan Hall Making Final Push to Open With Crowdfunding ...Eater SeattleBlack and Tan Hall, an upcoming music venue/restaurant project in Hillman City that aims to unite the diverse neighborhood, is nearly open. The owners are ...and more » [...]

http://hamodia.comKnesset Approves Changes to Advance Crowdfundinghttp://hamodia.comYERUSHALAYIM - The Knesset Finance Committee has approved changes to existing statutes that will accommodate crowdfunding, allowing small companies and start-ups to issue prospectuses to potential inve [...]

Rentivo, a Vacation Rental Platform, Exceeds Crowdfunding Target by 36%Yahoo FinanceRentivo (rentivo.com), a vacation rental marketing/management software company, today announced it has successfully oversubscribed its CrowdCube.com crowdfunding campaign, raising £341K/$425K and excee [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |