Crowd Funding: Angels, Not VCs, Will Get Disrupted

I wrote this before Angel List syndication was really being talked about. I’ve decided to post this and I’ll do a follow up on Angel List in a week or two, once I’ve had time to really think that through, but I still stand by what I’ve written below. 

There has been a lot of discussion about how the crowd funding portion of the Jobs Act will affect the startup investment community.  As part of my Kauffman Fellowship project, I spent some time researching the subject and came to the following conclusions.

First, it bears noting that crowd fundable companies are a superset to Startups (see Paul Graham’s essay for a good definition of Startup).  Funding for businesses that don’t have the potential to scale will be done via crowd funding, not by historical startup investors.

My belief is that traditional VC may be disrupted some but that angels and micro VC’s will need to make larger changes.

Why don’t VC’s get disrupted as much as Angels?

Deal flow:  Crowd Funding and general solicitation will give founders the ability to access a wider pool of capital.  For traditional angels this gives them greater access to deal flow but also more competition.

VC’s are looking at companies full time and they generally don’t need more deal flow, thus this will have a much larger effect on angels.

Winning deals:  When a deal is hot and different forms of funding are competing for access, who will win?

If a founder wants only cash, then crowd funding may have the upper hand here, but this is rarely the case.  Most founders want things in addition to money:

  • Access to a rolodex
  • A sounding board for ideas
  • Advice and another point of view
  • Follow on capital and / or fundraising help

While the crowd may theoretically be able to provide these functions, it would be in a very inefficient manner.  Soliciting advice from board members is a task, doing it from 75 angels would be a nightmare.

Follow on capital:  Savvy founders have already begun to worry about the “party round” where several angels or micro VC’s all invest a small amount.  The issue companies have run into is that no one is really invested enough to make the effort to ensure the company can raise further financing or lead a bridge in the case of a hiccup.  Better to have one or two investors who really care than ten who are simply interested.

Introductions:  Trying to figure out which of the 30 investors will give the best intro to a potential partner will be problematic.  Maybe a software platform can help with this, but if so I haven’t seen it yet.  If you happen to be developing one get in touch with me please.

Finally, many traditional venture firms have moved to B & C rounds.  When you need to deploy $600M it is much easier if you write big checks.  The industry is still in the process of a shake out, but those left standing will have more capital in the future if returns revert to the mean. (If they don’t then the whole ecosystem is going to have to change radically.)

For all of these reasons, I expect crowd funding to have a much larger effect on angel communities than on venture partnerships.  But either way, I’m looking forward to seeing it all play out.

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