What VCs Really Think Of CrowdFunding ?

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By Lora Kolodny WSJ Blogs

New financial regulations that let startups or funds raise capital online, and broadly advertise that fact, are shaking up the early-stage investment scene. Now venture capitalists are taking a closer look at equity crowdfunding.

In what appears to be a first for venture capital in the U.S., early-stage fund Foundry Group said last week it would commit $2.5 million to equity crowdfunding deals via the AngelList investment platform.

The effort, called FG Angels, makes use of a new AngelList service called Syndicates, which enables an individual accredited investor or a fund to create, in effect, a mini-VC fund online.

With AngelList Syndicates, a firm like Foundry Group or a prominent individual investor like Jason Calacanis can invest their own money in a startup and raise additional money on the company’s behalf. People who join their syndicate invest automatically in their deals, and agree to pay them “carry,” or a percentage of future returns from those deals.

For investors with a good reputation and a following, the appeal is that it’s easier and faster to form an AngelList Syndicate online than to form a venture capital or seed fund, which entails the writing of a private placement memo, locking in limited partners  and more.

Aside from Foundry Group, no traditional firms have publicly aligned with and committed funds to an equity crowdfunding platform in the U.S.

Foundry Group Managing Director Brad Feld says his fund’s limited partners responded favorably his firm’s initiative. The firm is investing from a fund of about $225 million, and the FG Angels piece of that is $2.5 million which partners view as “additive” to what they are already doing in seed-stage deals, he said.

Dave McClure, founding partner of the global seed fund and accelerator 500 Startups, says with the exception of Foundry Group, most venture capitalists are downplaying the importance of equity crowdfunding and syndicates.

Mr. McClure said, “[Traditional VCs] may disavow how much impact [equity crowdfunding] is having right away, but definitely it’s moving the needle.”

By giving the best angel investors a chance to become a VC without having to raise a fund right away, he believes AngelList Syndicates will “put crappy VCs out of business, and put pressure on seed investors in general.”

Should VCs be truly worried about a competitive threat? Or should they embrace these platforms to make deals online?

We asked notable investors – both from the traditional venture world and new platforms – for their predictions about how equity crowdfunding will impact their industry.

Alfred Lin, Sequoia Capital

Crowdfunding is great and is coming at the right time. In general, the cost of starting a company has come down so that someone interested can come out of school with an idea and get crowdfunded. That’s great for idea generation, prototyping and the like.

Alfred Lin

But we also know it’s harder and harder to build a company. If you have a good idea there will be nine competitors now. Trying to help a company or founder you think is special to get above the noise is job one for VCs.

Equity crowdfunding will probably have more of an impact on seed rounds versus venture rounds. People will ask the question: Will this hurt returns for investors?

We’ll have to up our game and I think we have been, at Sequoia at least.

Equity crowdfunding platforms can complement and provide a signal to us, in much the same way that Kickstarter and other rewards-based platforms have done already. The information in those platforms should be interesting to VCs. How you separate signal from noise is a much deeper conversation and we’re all thinking through that now.




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