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

The VergeDonald Trump's terrible crowdfunding site was a microcosm of his political careerThe VergeAnd from the beginning, the site had Trump's populist edge. Zanker boasted that “the reign of Kickstarter's Brooklyn hipsters is over,” referring to Kickstarter's New [...]

FortuneCrowdfunding: Women Better at Raising Money Than Men Are ...FortuneA new study has found that women are generally better than men at crowdfunding.Women are better at crowdfunding than men, shows study | The ...The IndependentWhy women join the crowd: Gender gap in bank lending, [...]

Wired.co.ukAfter budget cuts, Museums are crowdfunding to preserve historyWired.co.ukIn 2015, the Smithsonian National Air and Space Museum in Washington, D.C. launched its very first crowdfunding campaign to 'Reboot the Suit'. The idea was to raise much-need funds to conser [...]

Yahoo SportsCan crowdfunding save women's college hockey?Yahoo SportsOn Thursday, Million and the WCHA announced a crowdfunding initiative through RallyMe.com that allows supporters to make tax-deductible donations to the League. RallyMe is a crowdfunding site that's been ut [...]

ForbesCrowdfunding's Death Has Been Greatly Exaggerated - Creators Ship, Especially In ChinaForbesBased on recent media reports, it looks like crowdfunding is now in the "disillusionment" phase of the famous Gartner hype cycle, after peaking a few years back. I will arg [...]

How Women Trounce Men When Raising Seed Crowdfunding CapitalForbesMale entrepreneurs may account for the majority of business owners raising finance on crowdfunding platforms in the UK, but their female counterparts are far more likely to get the support they seek, new research shows. [...]

Grand Forks HeraldWomen's WCHA launches crowdfunding campaign to improve leagueGrand Forks HeraldThat mindset led the WCHA to announce a crowdfunding campaign Thursday, July 20, to help fund the league's expenses and lessen the financial burden of the seven remaining schools [...]

Gamasutra (blog)Gamasutra: Anti Danilevski's Blog - The problems of crowdfunding ...Gamasutra (blog)The Art & Business of Making Games. Video game industry news, developer blogs, and features delivered daily.and more » [...]

Woman turns to crowdfunding to publish cookbookOntario Argus ObserverVALE — While she was growing up in Vale, Allison Brewer says she learned how to cook for family and harvesting crews. Receiving many requests for written recipes combined with her passion for old-style cooking and ba [...]

CNBCAfrica.comCrowdfunding changing people's livesCNBCAfrica.comCNBC Africa's Tshepho Modiba is joined by Mosa Nyamande, Head of Operations and Technology at Khonology for a look at Crowdfunding, a method used to collect many small financial contributions by tapping into the [...]

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 |