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.
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.
Annie Kadavy, Charles River Ventures – My hope is that equity crowdfunding creates more opportunity for entrepreneurs to take a real shot on goal. Having more people trying to start companies does good things for our industry as a whole, regardless of where they are getting those early dollars.
My fears would be, and I think about this from the CEO perspective, that funders and recipients would have different expectations. Early stage investing at Charles River Ventures is a high-touch thing where we have a relationship for many, many years with the CEOs we invest in. We set aside expected follow-on capital to invest in that company, whether that’s for growth or a bridge round. On an equity platform, it’s not clear to me that would always be available. That concerns me.
I’m not particularly concerned that equity crowdfunding would have a negative impact on the VC world. Equity crowdfunding platforms could even be useful for international investors who want to get plugged into the Valley.
Whether you’re an institutional investor or making investments personally, if you have a process that’s already working for you–where you’re plugged into the deal flow you want, and able to invest in companies and founders you like–you probably won’t need to transfer your process to an online platform.
Ultimately, VCs invest on behalf of our limited partners. Platforms may not be the most cost-effective way of doing so because of associated transaction fees and charges. We still don’t know what the platforms will end up looking like, so it’s too early to tell.
Jeremy Liew, Lightspeed Venture Partners – I don’t see equity crowdfunding or AngelList Syndicates as anything super-new, actually. It’s an amplification of something that was already happening in the startup ecosystem. Several years ago we started to see an increase in “super angel” or individual-led seed rounds and the so-called party round.
When you have a lot of people in a deal, and there’s nobody with more than $25,000 to maybe $250,000 at stake, the investors may not be as motivated to do work to help the startups or founders. It’s not to say they won’t return calls or make intros. But you can get a “tragedy of the commons” risk, where for the investors it’s a diffuse cap table and they will just do minimum work and hope for the best.
Institutional investors act as a partner, thinking proactively about how to help their companies and founders. Time and again, we invest with firms like Sequoia, Benchmark, NEA, Kleiner, Accel, Matrix and Greylock, because we know when there’s work to be done, they will do a fair share.
It would be highly unlikely for most high-quality investors to use an equity platform to do a deal. They should want to own more of a company that they truly believe in.
Rory Eakin, CircleUp – I think equity crowdfunding puts pressure on VCs. For the first time, one of the three major components of the VC model is being undercut by new services. What I mean is that traditionally, VCs offered their investors access to proprietary deal flow, investment acumen, and “value add” to their portfolio through the life of the investment.
Equity crowdfunding and the new rules about general solicitation fundamentally change the proprietary-dealflow piece. Companies can now advertise they are raising capital to a wide range of actors including VCs.
We’ll probably see the best firms continue to outperform with contraction overall in the industry accelerated by equity crowdfunding. Funds not in the top quartile and new funds will face the most pressure because access to deals will be more prevalent, yet shareholders and companies will want to see extraordinary value.
On the other hand, equity crowdfunding can be very complementary to traditional funds. Private equity firms send [CircleUp] lots of dealflow already, usually referrals for companies that are too early-stage for them to make investments now. We also help angel groups close out rounds when they may have limited resources. So far, CircleUp has backed 19 [consumer packaged goods] startups and raised about $20 million for them collectively.
(article by L.Kolodny)