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U.S. Startups Fail to Attract Expected Crowd of Small Investors

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Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#41

Post by [deleted] »

seibelj wrote: post #33
cstavish wrote: post #28

Earlier quoted context omitted.

Accredited investors/VC (disclaimer: I am neither, but co-founded a VC-backed startup) are often wary of crowd funding because of the idea that with more investors, the more headaches that can occur with additional capital raises. Having a big cap table doesn't make company operations easier. I honestly don't know how valid those viewpoints are, but that's what I've heard.

I don't see why this is an issue though, just promise quarterly updates and clearly state rights on future raises for existing investors. They can follow-on or not. All of these issues can be solved, it's just more excuses. It should be easier to have 100 investors who all agree on everything than 4 investors you have to baby and cajole and manage their whining because they feel entitled to personal service.

[deleted]

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#42

Post by lumost »

seibelj wrote: post #33
cstavish wrote: post #28

Earlier quoted context omitted.

Accredited investors/VC (disclaimer: I am neither, but co-founded a VC-backed startup) are often wary of crowd funding because of the idea that with more investors, the more headaches that can occur with additional capital raises. Having a big cap table doesn't make company operations easier. I honestly don't know how valid those viewpoints are, but that's what I've heard.

I don't see why this is an issue though, just promise quarterly updates and clearly state rights on future raises for existing investors. They can follow-on or not. All of these issues can be solved, it's just more excuses. It should be easier to have 100 investors who all agree on everything than 4 investors you have to baby and cajole and manage their whining because they feel entitled to personal service.

That assumes that the company proceeds through successive rounds with an upwards trajectory. If the company falters and takes a down round the initial investors may disagree with the direction or even sue.

If the company needs to be recapitalized or restructured under a time crunch, tracking down 100 loosely involved investors and getting them to sign the deal may not be feasible.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#43

Post by zebrafish »

FailMore wrote: post #37
seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so raising money from a large collection of distant angels tends to be a signal that the quality of the company must be low - as they should have tried to raise from high quality individuals first. A company with crowdfunding will have to display stronger metrics…

as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn

Exactly the point the parent was making. Those are big time contacts. Somebody outside of the valley now has a chance to get $1MM(!!!!) of seed money for their idea without having to relocate and schmooze and network.

I'm as big a proponent of real world social skills as anyone, but this removes a significant barrier to entry for a lot of would be entrepreneurs.

Also, wouldn't a large number of crowdfunders indicate a better product-market fit?

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#44

Post by onion2k »

nathan_f77 wrote: post #34
seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

> Not every idea has to have billion dollar potential If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would happily join a smaller "lifestyle" company as an employee or cofounder, but I probably wouldn't give them much money. I expect 9 out of 10 of my investments to fail, so I also need to look for those 10x opportunities. On the other hand, if it's just a token amount…

That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#45

Post by ericb »

FailMore wrote: post #37
seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so raising money from a large collection of distant angels tends to be a signal that the quality of the company must be low - as they should have tried to raise from high quality individuals first. A company with crowdfunding will have to display stronger metrics…

I think this bias is mistaken--because VC's use their network as a filter, it falsely equivocates strong business/strong founder with individuals who landed on a social graph that happened to have VC connections.

Biases like this are market inefficiencies that can provide outsize returns for those who learn to look past it.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#46

Post by dangerboysteve »

seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

I'm on a few email lists from these crowd funding sites and the prospects that get emailed to me are less than stellar.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#47

Post by ericb »

cstavish wrote: post #28
seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

Accredited investors/VC (disclaimer: I am neither, but co-founded a VC-backed startup) are often wary of crowd funding because of the idea that with more investors, the more headaches that can occur with additional capital raises. Having a big cap table doesn't make company operations easier. I honestly don't know how valid those viewpoints are, but that's what I've heard.

I believe it. I also know that Realtors aren't too fond of For Sale By Owner houses. I suspect this comes down to a similar effect.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#48

Post by SomeStupidPoint »

nathan_f77 wrote: post #34
seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

> Not every idea has to have billion dollar potential If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would happily join a smaller "lifestyle" company as an employee or cofounder, but I probably wouldn't give them much money. I expect 9 out of 10 of my investments to fail, so I also need to look for those 10x opportunities. On the other hand, if it's just a token amount…

Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with.

Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big".

2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.)

That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing.

I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.

Re: U.S. Startups Fail to Attract Expected Crowd of Small Investors

#49

Post by rhizome »

riazrizvi wrote: post #40
seibelj wrote: post #25

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) netw…

Even as a founder I can understand why VCs might be reluctant. Investors accumulate control of a company over each round of funding. This enables them to rest easier that their money isn't going to be mismanaged. The investor-bloc's influence is predicated on the reasonableness of the other investor partners, if they don't see eye to eye then their votes don't have influence. An equity crowd is not a strong partner f…

Historically and empirically, does this VC influence and control result in better-run and more-successful companies?
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