seems it is increasingly likely to be about 'entry strategy' options - as 'exit strategy' take the back burner for a while ... ?
DonRyan
· 1 year ago
The curse of that type of system, barring massive change to the regulatory mechanisms, is that would would be restricted on what you could and couldn't say about your portfolio companies. Would you really want to start each post with a disclaimer? It would be nice if there was a secondary market to invest in promising emerging companies but, as you suggest, I would take a tremendous shift in the current thinking.
grahamje
· 1 year ago
Really interesting post. Is anyone conducting an experiment in 'crowdsourced' venture capitalism? There would be considerable regulatory hurdles and risks but sites like zopa.com are already doing this for lending, enabling peer-to-peer lending and, as far as I know, generating much more reliable returns than our current financial institutions are. I wonder if anyone is thinking about a similar kind of approach to start-ups. There would always be need for experts to 'screen' propositions, and for business models to be properly scrutinised, but the idea that through small subscription or peer-to-peer offerings there was a way for individual investors to get in could be very powerful. It could also generate powerful loyalty to new propositions if people felt that they'd directly invested. I've been looking at the way Google stock has tanked in the last couple of days and thinking that the main markets are just broken. If we are facing a serious depression, then new financial models and a much more co-operative approach to investing, maintaining value and developing genuinely social enterprise is needed in any case - just for survival. I suppose people can do some of that through buying shares in publicly offered VCTs but I suspect that there's something about more personalised, social web relationships that could make a real difference.
Geoff
· 1 year ago
Maybe we can get Fred to set up a Zopa style VC fund. the system is truly broken so now is the time for radical alternatives.
fredwilson
· 1 year ago
I am not too excited about that to be honest
Sounds like a regulatory nightmare
Geoff
· 1 year ago
"Sounds like a regulatory nightmare" and that of cause is the perfect irony of the situation :-(
krotscheck
· 1 year ago
It is a regulatory nightmare, especially considering that even with qualified investors the cap on shareholders in an LLC is what, 99? To set up a crowdsourced venture fund that allows investments of as little as, say, $100 per person you'll have to find a creative way of acting as the primary investor without remaining liable if/when the startup tanks. Structuring it more like a credit union or mutual fund is an option, but then you're again taking investment control away from the individual.
We explored this option at StartupWeekend Columbus back during the summer. It's a brilliant idea, and there are tons of people interested, but without having a regulatory expert on the team we couldn't take it further than the concept stage.
Jay Parkhill
· 1 year ago
I have talked to a lot of people about crowdsourced securities offerings. The problem is that if investors are not accredited ($1M net assets and/or $200k annual income) the SEC only allows 25 of them. More than that and you have to make it a public offering.
I hate to be a wet blanket, but startup investments are risky. The people who can *afford* to lose their money often do.
It *would* be neat if a reputable VC firm could figure out how to raise a fund from retail-level investors similar to the way kiva.org or political candidates have solicited many small contributions. That way there would be (we hope) a steady hand behind the investments.
The securities regs for VC funds are even tighter than for the portfolio companies and management would be a challenge. Fun thought, though. Maybe if there is a single designated LP representative to make decisions and field questions . . .
Joseph Flaherty
· 1 year ago
The accredited investor rules are great at preventing stock fraud, but with the benchmarks they set ($1MM in the bank or $200K salary for a couple years) they keep a lot of bright people out of the market. It is especially annoying in the web apps market since the people who have the best knowledge of the space are typically earlier in their careers and lack accreditation.
Some commonsense solutions like allowing people to invest in private companies at some capped percentage of their salary (rather than at a huge fixed benchmark) and and pooling those investments (also currently illegal) would be a great step forward. It could also be hugely disruptive in the seed investment world.
Hopefully the new administration will return the favor to the younger, social media savvy voters and relax the rules so they can put their tech knowledge to work for personal investment.
Brian
· 1 year ago
"This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen."
I would say the regulatory regime didn't just allow that to happen, but rather forced it to happen. Agree 100% that small investors should be able to invest in more things. They'll learn very quickly if they keep losing money. Also, it seems to me that the more regulation there is, the less investors (even institutional sized) are interested in doing their own due diligence (as evidenced by AAA CDOs recently).
Ed
· 1 year ago
This nation is desperate for this coherent thinking.
"This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen."
Mr. Smith, can't you go to Washington?
We understand you don't want or need a private jet Fred. To those of us outside the encamped, established dysfunctional core in DC (who brought this giant to its knees), that's a good thing.
The internet as a view of society shows a more fluid, more dynamic and more participatory national and international community than ever before. That's where we're heading in general. The genie can't fit back in the bottle. There is then no better place, (except perhaps education), to balance certain sensible protections, with freedom to endorse with our resources those entities we believe will, and desire to see, thrive. More voices, and therefore more ideas, can be contributed to the systems and constructs each individual and family is affected by. If it is my responsibility to pay taxes so they can become sutures for wounds someone else caused, then I have the right direct what's left to where I believe it will best serve my family.
Only the staid or responsible would want to avoid change (which always begins with exposure) to the financial sector.
They're there. They've built it. They've brought drought, yet harvested the vineyard before the rain stopped. Now they want to control who gets what wine, and won't let me buy a glass.
llama
· 1 year ago
So you want to allow the public to buy shares of companies that are still sold in secondary markets for private investors. This gets around the entire point of the our securities laws which were to protect investors by bringing transparency to equity markets. I have no problem with regulatory arbitrage, but I don't think you can maintain a veneer of helping the little guy by allowing them to get involved in sophisticated private equity transaction (if you wanted to really help them, you'd bring a company public or try to figure out a new way to bring a company public [probably with lower costs])
fredwilson
· 1 year ago
I don't want, need, or desire to sell my stock to others
I am just talking about what I see out there and the frustrations of others who want in on the action
Tom Bakalis
· 1 year ago
I am one of those who are frustrated. What if one is an accredited investor? What options are available?
fredwilson
· 1 year ago
You can become an angel investor in deals
We often invite angels into the first round of our deals
But the minimum investment is usually $25k and that's a lot for most people and you wouldn't want to do just one
You need a portfolio in the venture business to mitigate the risk of each deal
Tom Hughes
· 1 year ago
Could one organize an "angels' club" to get around this? New members could only join with unanimous assent of the existing membership, and would begin with a minimum investment in the pool; new investments need a super-majority (75%) of agreement. I'm wondering if such a structure might get the balance right between involving qualified investors but avoiding the disclosure burdens of the public market. It wouldn't require professional management, club members would bring in deals. I know this happens informally now, I'm wondering if there is a way to industrialize the process while skirting the regulatory burden.
evbart
· 1 year ago
This is already happening in a pretty "industrialized" way.
I do bizdev for Angelsoft, and we've got over 400 angel groups and VCs using our platform to more efficiently take in, screen, and invest in deals.
We're definitely seeing an increased ability to syndicate a deal across lots of small groups of angel investors to raise larger rounds of financing, but we obviously are facing the same barrier with the "accredited investor" requirement from the SEC, and we spend a lot of time making sure we're on the right side line.
Thats part of the reason that we've focused on targeting investment groups, rather than just individual angel investors. They are harder to qualify.
It wouldn't be all that tough to extend our existing infrastructure to individuals, so you could massively crowdsource an investment.
andyswan
· 1 year ago
Actually what we need is to let people make their own investment decisions without the NAG of the nanny government, regardless of their income level.
Ed
· 1 year ago
Amen Andy!
issackelly
· 1 year ago
Fred, How do we get this started? What would it take from Investors, entrepeneurs, lawyers, and (currently) small business owners?
Your last paragraph hits all my feelings about the current financial situation on the head. EXCEPT people have been profiting from new technologies and companies without VCs. It takes a gigantic effort, and that's what I see as being the deterrent.
Without major backing it can take a very long time to get the momentum needed to go from idea to business. I think that refactoring the way that companies are backed is in order (not that the current system is bad, it just doesn't help out those who are independent of investors).
Would it be possible to gather an open community of independent thinkers, investors, and entrepreneurs for this? A cross between public investment, Y-Combinator and Kiva?
Something like this would be wonderful for the grey area between 'startups' and 'small businesses' who have higher aspirations, but aren't looking for the normal VC to Exit models.
fredwilson
· 1 year ago
It seems like something that an entrepreneur could get his/her arms around and start building
Igniter
· 1 year ago
It is something I've been starting to work on. Some recent directions sparked by a convo with Howard Lindzon and the StockTwits model.
In general we're moving into times where we need to be much better at leveraging social and human capital in addition to financial capital. This works well in orgs that have a more 'open' type of organization but can also be done by more conventional ventures.
Investing, using, and getting rewarded for contributing this type of capital is what we are moving more actively toward - and I think that is more appropriate than tweaking accredited investor guidelines.
Just posted a quick primer on what I'm thinking on my blog for any that are interested.
Thanks again for your continued posts (contributions)... this one example of how you invest with and benefit from non-financial capital as do all those that participate in this or any other blog or conversational media.
howardlindzon
· 1 year ago
amen, I want to be a part of it. have been working towards it for 5 years
Igniter
· 1 year ago
Giddyup! Comment in the social venture commons post or d me on twitter (@igniter) and we'll get to it.
aarondelcohen
· 1 year ago
That's why Roger Ehrenberg should be joining the Obama administration at Treasury or the SEC.
Aaron
Brian
· 1 year ago
This sounds all well and good until someone loses their life savings and starts whining about how regulations are lax. Then we have to bail them out.
See real estate. See stocks. See Auction rate securities. See Subprime MBS securities. All I hear is how people did not understand what they were investing in. If you don't understand it don't invest in it.
All this idea would do is encourage people to chase returns. If you do not have $1M in net worth and $200k in income, you really should not be investing in firms with very few accounting controls.
Really, if you have less than a $1M net worth, you should not be investing in individual stocks period (outside of your comp of course). The risk is not worth the return.
howardlindzon
· 1 year ago
well said as well.
no easy answer.
wisaac
· 1 year ago
FFred,
Thanks for the inspiring post. I think there are ways for average investors to tap into portfolio companies, but now is not the right time. I think SPACs, or special acquisition companies, have gained popularity in Private Equity and could be a great vehicle for Venture Capital. I know these types of equity vehicles had a bad run during the 90's, but they could be very powerful in the right hands.
Finally, does anyone know if it is possible for a VC firm to have a public offering set-up similar to PE firms who went public?
fredwilson
· 1 year ago
Yes its possible and has been done
AR&D was public
wisaac
· 1 year ago
Doriot was a pioneer in many regards.
I am interested to know why more VC firms don't pursue this. Would their be too many regulatory hurdles?
Jake
· 1 year ago
Public company means public disclosure, which most VCs are highly alergic to... not without reason
Russ Salsbury
· 1 year ago
I think that if you dig into the history, you will find that it "failed" and had to sell out, because, as a public company, it had to reevaluate its portfolio every year and take yearly profits and losses. If the same rules apply today, it would make it difficult to make long term investments. IIRC the rules for public holding companies are much different than those for operating companies. In any event, I am neither a lawyer nor an accountant and my memory is a couple of decades out of date.
Michael F. Martin
· 1 year ago
Right on. The unintended consequence of SOX is that it favors incumbents.
Venkman
· 1 year ago
Regulation always favors the incumbents. In a best case scenario it's an additional barrier the new entrant has to hurdle. In most cases it favors those with deep pockets to buy lobbyists and legislators.
I once invented a breakthrough anti-paranormal technology and some the EPA shut down my partners' small business and unleashed havoc in the streets of New York.
Andy Freeman
· 1 year ago
> The unintended consequence of SOX is that it favors incumbents
Unintended by whom?
Besides, intent is only relevant as a proxy to help determine whether someone is likely to do something again. When someone(s) repeatedly do something that has a given result, it's absurd to give them a pass because they supposedly didn't "intend" that result.
ph0rque
· 1 year ago
hmmm... a crowd-wisdom-driven VC firm or firms?
DaveGoulden
· 1 year ago
I've been thinking about doing a start-up as a Consumer Co-op (think REI). This mechanism allows small investments from "members", who also vote on a Board of Directors. This is not a path to IPO and doesn't allow for perks like stock options, but an aggressive profit sharing plan can help make up for that. And as Fred says, IPOs may be gone anyway.
MattCooke
· 1 year ago
An exchange for private companies has just launched. It's called the PCM Exchange. Take a look: https://pcmexchange.com/
While it doesn't solve the accredited issue, it does provide a way for private companies to raise money without the regulation of going public. It also allows investors to trade the stocks of these companies.
Seems like a good idea. We are considering it for our own start-up.
zburt
· 1 year ago
I don't trust your site. Bad design. Not accessible.
MattCooke
· 1 year ago
It's not my site. I have nothing to do with it but found it interesting.
fredwilson
· 1 year ago
Got any suggestions on how to fix that?
zburt
· 1 year ago
Eliminate negative social proof: The fact that they are offering bonuses to the first 50 private companies and 100 accredited investors to sign up - on their home page - is a red flag that they don't have 50 private companies or 100 accredited investors yet. I mean, they succeeded in pulling off an 'institutional' look on their website but they don't have that kind of credibility for their brand/site/whatever
The fact that they credit their web design firm at the bottom of the page is a subtle error that screams volumes. "Designed, developed and maintained by Interactive Media Associates." Excuse me? That's an SEO firm.
As for accessibility, notes: 1. When you click the original url https://pcmexchange.com/ it gives my Firefox client some SSL security error and forces me to go to https://www.pcmexchange.com. 2. I'm never a fan of lots of text on the homepage, especially if it's in a small font size.
Paul
· 1 year ago
"...raise money without the regulation of going public..."
Blimey, I haven't heard anyone claiming that the failure of CDS, Subprime, and all our general malaise would have somehow been better if only there were LESS regulation. Isn't it more the case that problems happen when schemes invented to try to circumvent bothersome "Rules" and "Laws" come unravelled precisely because they did?
"Secondary markets in Private Equity" sounds like a term I might be hearing about as the next big thing in financial disasters when we've forgotten all about Enron and moved on past Subprime.
brian
· 1 year ago
could we create replicate the legal mechanism used by slicethepie, and crowdfund startups? or bundle startup debt into CDO's and sell slices to high-risk investors?
dherman76
· 1 year ago
Vision: love it. I've shared it with you in the past. Reality: going to be hard to pull off, but will happen. won't happen extremely fast, but inevitably, I can see this existing.
Angelsoft, Advanced Equities International (AEI), angel groups, and my own network give me access to investment opportunities, but being able to spread the investment opportunity over many players than over a few is mutually beneficial as noted above... from a startup perspective, limits risk of investors hitting financial hardships, and from an investor standpoint, gives access to many deals with potentially better information on them because there is more investment knowledge to be shared (wikipedia for investment opportunities anyone?)
I love the vision as an angel investor and entrepreneur.
Daniel Tunkelang
· 1 year ago
Am curious if the rules only apply to domestic investments. Does this create opportunities in countries that have less stringent regulations? Of course, there may be a negative correlation between the stringency of the regulations and the likelihood of being defrauded. Caveat emptor. But it does strike me that nations would compete to be most attractive to entrepreneurs--especially if all that matters is where the company is incorporated.
curmudgeonly troll
· 1 year ago
no problem... just list on Vancouver Exchange - excuse me - TSX Venture.
also much less pesky regulations about insider trading, ramping stocks.
DaveCrain
· 1 year ago
Amen Fred.
I work in a technology incubator and regularly attend Angel and VC meetings in our region, in addition to coaching entrepreneurs on how to get in front of same. From time to time I come across companies that I wouldn't mind putting a couple grand into, but can't for many of the same reasons.
In today's age of Twitter, social networks and online communities - I just wonder if it wouldn't be easier for an entrepreneur with a great business model to raise 400 $1,000 investement versus a one time $400K Angel investment. Obviously the backend accounting and legal for something like that would be a nightmare, but there has to be a way to satisfy Washington's interest in consumer protection with the consumers interest in taking a well understood risk.
Todd Cochrane
· 1 year ago
To be honest with you I really hate that Qualified Investor crap. To be honest its a rule to keep the rich, rich and those that could afford to throw some investment money at startups out of the game. It drives me nuts..
Gopi
· 1 year ago
Would converting a Venture Fund into a ETF help?...in the same note is it possible to run a hedge fund as a ETF?, this way even small investors can participate and no issues with lockdown period or redemption!
BTB, I am not a expert and dont understand the regulations, so this maybe a stupid idea!
ThinkerDon
· 1 year ago
Fred, I am sorry I prefer to be anonymous on this.
Think of it this way: the market is basically saying that based on past history, these "exits" didn't make sense for investors who ultimately funded them (either by buying into IPOs or by holding stock in public companies that did the acquisitions, funding exits).
You have yourself pointed out how many of your portfolio companies that got acquired ended up destroying value. Whatever the cause of that is - contrary to what many people believe, I think there are faults on both sides - honestly, how many founders actually *wanted* to stick around and deliver the value to the acquirer, once they already encashed that value for themselves? - the market's verdict is clear. We will likely face a generation of really low valuations. Trust needs to be rebuilt very slowly.
It is an existential problem: the very fact that exits are available made everything think short term, and focus on the exit, indeed, even build companies for the exit i.e build-to-flip. Once people started building such exit focused companies, those became less and less valuable to the public as well as acquirers, because what you have are founders and employees who want to take the money and run.
Think of it this way: if an investment bank comes in and acquires your entire portfolio for 2 or 3x the money that went in (based on your historic track-record), and they do this as soon as you finish a funding round, what is the rational incentive for you to sit and nurture your portfolio? You can simply start funds serially, "put the money to work" fast, and flip it to an IB (which would then flip it to some petro-fund or whatever). What would be the quality of your portfolio under such a system?
That's in effect what has happened at the start-up level. I live in silicon valley, and I am amazed at the bubble-thinking of an entire generation of people, still chasing "the dream" - the dream of a fat exit from a sucker. Alas, the supply of suckers turns out to be limited.
Sorry for the long rant ...
Brian
· 1 year ago
Agreed.
Your exit strategy should be a business that generates cash.
The problem is not the lack of investment opportunities. It is the VC model. You do not need an exit if your time horizon is more than 5 - 10 years.
I know Fred's funds do well, but most VC funds perform poorly.
fredwilson
· 1 year ago
That's right Don
But many of our portfolio companies have built large and sustainable and very profitable businesses given enough time
It often takes 5-10 years to do that
Patience is required for sure!
davemc500hats
· 1 year ago
agreed... and working on it.
(google "Securitizing Happiness")
howard lindzon
· 1 year ago
put in on the list for us at stocktwits...i have an idea :)
DomesticMouse
· 1 year ago
So what is it going to take to create an online secondary market? The technical side appears reasonably easy, a website akin to Intrade where people can register an interest to buy or sell shares at set price points. The regulatory side of things, however, is completely opaque to me.
So, as a web technologist who likes designing and implementing web applications, what is required from a legal stand point to make a legal secondary market?
jyothirmayee
· 1 year ago
This would be revolutionary in the venture industry. Thanks for the post.
For long I have been thinking of a way to push the micro-financing model for angel funding and maintain accountability and some regulations. Though I do believe that later rounds should come from bigger VCs for all the support they bring in, the initial rounds which most do raise from friends and family is better off remaining with individuals pooling together to fund 50K for a startup. Saves time and effort for founders, if people who are pooling in are excited about the idea they would pitch in for morale and suggestions too.
Amazing. Seriously, I have always wondered why isn't the solution for all the financial worries of startups and the VC play. This is the "change" that would make a lot of things easier, ensure startups keep up their momentum and not waste in VC fund raising process. More you have angels who are truly angels backing founders. (I understand this can hurt lest rational thinking is lost) Micro financing at angel level (be it 5 friends/colleagues or more) is great. Someone needs to institutionalize this or have some learnings on how to deal with accountability, resolving dispute and the like. For people in India, Israel, Ukraine and the rest of east Europe the startup costs are quite low. $100K is like close to upper end angel funding. I know of at least 6-7 ex-Trilogy startups in India - brilliant guys, doing it right, when it comes to funds Indian VCs are most risk averse they wouldn't invest in anything other than jobs, matrimony, real estate and travel. I have always wondered why would it really bother for couple of ex-Trilogy in US to invest. For 2 guys to put something like $50K it would be hardly anything.
David
· 1 year ago
I couldn't agree more, I have run into this issue several times. Wouldn't it be amazing if people could do this? That would be incredible. If anything, you'd have really active, passionate people who will vouch for a company more than ever before because they feel a part of it since they hold an ownership stake. A minimum requirement of some of these investments is just too high, especially with looming high legal costs. Fred, if you can lead this movement to make this happen, then that would be incredible and have such a profound impact on the activity of informed users who want to take part and help companies they love as much as possible without having to be a VC. Of course, after all, even VCs face the challenge of entering a deal because of constraints in that only one VC is going to have enough room to invest to get a significant percentage. For passionate investors, the size isn't the important part; rather, it's being a part of something where you can join in on the growth of the company by being a shareholder. It's not about retiring after the company succeeds, but it's about being there with the company and, if things play out as you hope, seeing a nice sum, and if they don't, then it's ok because it's a company you care a lot about. So the question is then Fred, how do you propose you and passionate investors out there who want to do this get involved to make this happen? To set a great example, do you think you will figure out a way to do this with the companies you hold investments in? Thanks so much.
fredwilson
· 1 year ago
I think we need entrepreneurs to step up and innovate in this sector
Keeping it to the close community of ex-colleagues makes it more convincing for people to invest reducing the risk around evaluating competency, trust etc - additionally helps the startups to get involvement from past colleagues who could be experts in varied aspects.
As you said innovating here needs that I as an entrepreneur be much aware of the regulatory measures I put down there. Would you suggest to work with a current investment firm or if I can ask would you be interested to help me out. :)
fredwilson
· 1 year ago
I don't know much about india but I think its poised to be the next silicon valley
jyothirmayee
· 1 year ago
I wouldn't put such a big bet of being the silicon valley (not a humble comment) since infrastructure still lags way behind and the market would not be comparable to the current US market for next 5-8 years at least. Additionally the talent pool is sparse and economic freedom doesn't exist to take the plunge.
However it is possible to build great companies out of India serving for the bigger markets of US, europe etc at very low costs. Most startups with 3-5 people can operate with low operational costs (incl personal expenses of founders) less than $2000 a month. So something like $20K funding will free up these startups for well into a year to work peaceful and execute well. And $20K for past colleagues from US is peanuts.
I think Indian successes and entrepreneurial environment was vastly dominated by traditional services model till now and recently there has been a new wave of young folks with experiences working with their US counterparts who are really innovating and dare to launch new products and ideas at their own costs. Sadly, I think the VC firms don't have much decision power here or have lost hopes with success out of India except for traditional markets. So all of these companies are bound to struggle with financial crunch.
fredwilson
· 1 year ago
That's a sobering thought
David
· 1 year ago
By the way, let me add I'm most interested in this for name companies. It's great in concept to crowd source money for a company that hasn't grown or established themselves in any metric, but what's exciting to me in concept is investing in companies where I actually use their websites and would like to make an informed decision as part of an investment in those companies. This would be huge. Fred, looking forward to your guidance.
The entire issue of retail-level investors (not angel investors) investing in private companies/startups could be subdivided into three stages:
1. money transfer from individual/retail investors 2. management of collected sums/fund 3. investment of the fund money into companies
Parts 1. and 2. were superbly executed during the Obama campaign (for example see http://bit.ly/kwQ0). The collection part worked just fine. The channeling part of collected donations/sums was subsequently EFFICIENTLY spent/invested. Same principle, i think, only details are different.
The main difference will come here in part 3. Regulatory part comes in here.
Btu as said above, there is a huge market need and the market is familiar with individual financing/loans/lending/donations systems through kiva, zopa and election campaigns. Perhaps something can be done in terms of introducing some kind of legal/regulatory framework for such an idea to be implemented.
Jesper Bergmann
· 1 year ago
I think this is a very interesting discussion, however I think that money is not such an important factor in building a great companies as the competences and mentoring that comes with the money. That is why I don´t see a big benefit in investing in small companies that can not get VC funding unless those investments come with some specific competences and contacts that can help the company. In my view simply receiving envelopes with money from all parts of the world would not generate better returns for investors than I believe investing in blue-chip stocks will in the long run. Add to that that you will have a big issue in terms of agency problems, i.e. how do you monitor the guys you invest in, if they are not in your proximity and you don´t have any say in their business decisions.
This is not to come across to gloomy because I do not think the VC model is perfect at all, however it serves the important purpose of usually having people with industry expertise select the most fit investments and in turn investors will only invest in the best-performing VC funds, so while I´m sure the current system can be improved I don´t think the current state of affairs is that bad.
Blunder
· 1 year ago
First of all, direct investors in private companies do not want to give up their rights of first refusal, co-sale, etc. Most VC deal terms fundamentally hamper the development of a secondary market. Second, most private companies should not have large numbers of shareholders. They are difficult to administer and you would have to disclose too much information to too many people in order to have enough transparency for a true secondary market. Third, if you want to buy stock in illiquid, poorly understood small companies, you already have a place where you can do it. It is called the public market where thousands of small cap companies trade very infrequently. Truthfully, what kind of activity would you really expect to have with a secondary market of private companies? Every now and then there would be a lot of activity around a hot company and the rest of the time you could hear the crickets chirping.
I do NOT agree however that non-accredited investors should have access to these deals. That rule is there for a reason, and too many non-accredited investors would get hurt, or abused IMO
Agreed. And conversely, they could cause enough inefficiency to negate the benefit of such an organism.
Tommy_Mancino
· 1 year ago
Can't non-accredited investors simply form an LLC or other entity, which then invests? Corporate investment entities aren't restricted by 30 act requirements, and in any event, there are exceptions for officers/partners of corporations as well, right? Not to say that a firm would necessarily want or allow it. The requirements are ridiculous anyway. There are a lot of bright people, with multiple graduate degrees that don't meet the income/net worth requirements to be "accredited". That said, I have never seen these requirements stop investment from someone that really wants to invest, and the company/fund wants in the deal.
dean collins
· 1 year ago
i also dont get why people dont 'invest' into overseas companies that then invest in USA based entities.
without being rude - I sometimes find americans very limited in their 'global' thinking about how to get things done.
ValueClick Inc. (VCLK) is tradting at a PE ratio of less than 4.
Tom Evslin
· 1 year ago
Fred:
You're making a brave stand by advocating less regulation rather than more given the current conventional wisdom. Of course you're completely right that all the regulations and all the regulators didn't see and didn't point out that the balance sheets of huge publicly traded financial corporations were balanced on nothing at all.
Perhaps the fiction of regulation even lulled us into false security while regulation has also barred the exit door for good smaller companies and their investors (panic hasn't helped with exits either).
I think Fred is being brave and very cognizant of the fact that the current regulations did not accomplish what they were engineered for. a lot of ink had flowed to form the constructs as they were when this wide failure became apparent.
Then to me, it stands to reason that I should be able to invest where I see fit. The market will say yes or no. If my money is no good, let USV say 'Thanks anyway, maybe next year".
Change is needed before SEC standards start looking like the horror show that is our long tail tax code.
Tom Evslin
· 1 year ago
So what would you think of just saying no prior regulation, no illusion of regulation but strict enforcement of sanctions against fraud and caveat investor (investor beware) since there is no illusion of regulation?
I wonder, calling shots would be critical in here. Smaller Investment partners, it is easy to make a call, but with smaller investors pooling up and then to take a decision, it would be virtual nightmare, at as simple as it is said in theory.
valto
· 11 months ago
I'm excited. I have been thinking this problem of old VC model for several years from my start-up advisor role.
From the beginning of 2008, I started thinking solutions for this, in more serious level. On July I got an idea for an overall solution and started working on the business model for Venture Capital 2.0. At that time I had not heard or read about wiki fund or Entrepreneur Commons. These posts I have discovered after, we started to work on this in more serious way.
While working on building our founders team for Grow VC and doing some other stealth mode activities and viral marketing, I have found these articles and to me these all just proves the great potential of our model version, that still remains as it's been since July (for the main concept and solutions).
We now have a great team of founders committed to setup our version of Venture Capital 2.0 service and are excited about all of this - I can't wait to get 2009 going. Lucky for me it's only few hours to new year ;)
I feel this model will get sorted one way or the other, the path seems "so clear". Will it be us or someone else that will eventually succeed, remains to be seen....
All Comments
Sounds like a regulatory nightmare
We explored this option at StartupWeekend Columbus back during the summer. It's a brilliant idea, and there are tons of people interested, but without having a regulatory expert on the team we couldn't take it further than the concept stage.
I hate to be a wet blanket, but startup investments are risky. The people who can *afford* to lose their money often do.
It *would* be neat if a reputable VC firm could figure out how to raise a fund from retail-level investors similar to the way kiva.org or political candidates have solicited many small contributions. That way there would be (we hope) a steady hand behind the investments.
The securities regs for VC funds are even tighter than for the portfolio companies and management would be a challenge. Fun thought, though. Maybe if there is a single designated LP representative to make decisions and field questions . . .
Some commonsense solutions like allowing people to invest in private companies at some capped percentage of their salary (rather than at a huge fixed benchmark) and and pooling those investments (also currently illegal) would be a great step forward. It could also be hugely disruptive in the seed investment world.
Hopefully the new administration will return the favor to the younger, social media savvy voters and relax the rules so they can put their tech knowledge to work for personal investment.
I would say the regulatory regime didn't just allow that to happen, but rather forced it to happen. Agree 100% that small investors should be able to invest in more things. They'll learn very quickly if they keep losing money. Also, it seems to me that the more regulation there is, the less investors (even institutional sized) are interested in doing their own due diligence (as evidenced by AAA CDOs recently).
"This is the year that the banking and brokerage industries have completely let us down. They have failed to invest our money wisely. And the regulators who set the rules, the very regulators who make sure that no reader of this blog can invest in one of our deals, have allowed that to happen."
Mr. Smith, can't you go to Washington?
We understand you don't want or need a private jet Fred.
To those of us outside the encamped, established dysfunctional core in DC
(who brought this giant to its knees), that's a good thing.
The internet as a view of society shows a more fluid, more dynamic and more participatory
national and international community than ever before.
That's where we're heading in general. The genie can't fit back in the bottle.
There is then no better place, (except perhaps education), to balance
certain sensible protections, with freedom to endorse with our resources
those entities we believe will, and desire to see, thrive.
More voices, and therefore more ideas,
can be contributed to the systems and constructs each individual and family
is affected by.
If it is my responsibility to pay taxes so they can become sutures
for wounds someone else caused, then I have the right direct what's left
to where I believe it will best serve my family.
Only the staid or responsible would want to avoid change
(which always begins with exposure) to the financial sector.
They're there. They've built it. They've brought drought, yet
harvested the vineyard before the rain stopped.
Now they want to control who gets what wine,
and won't let me buy a glass.
I am just talking about what I see out there and the frustrations of others who want in on the action
We often invite angels into the first round of our deals
But the minimum investment is usually $25k and that's a lot for most people and you wouldn't want to do just one
You need a portfolio in the venture business to mitigate the risk of each deal
I do bizdev for Angelsoft, and we've got over 400 angel groups and VCs using our platform to more efficiently take in, screen, and invest in deals.
We're definitely seeing an increased ability to syndicate a deal across lots of small groups of angel investors to raise larger rounds of financing, but we obviously are facing the same barrier with the "accredited investor" requirement from the SEC, and we spend a lot of time making sure we're on the right side line.
Thats part of the reason that we've focused on targeting investment groups, rather than just individual angel investors. They are harder to qualify.
It wouldn't be all that tough to extend our existing infrastructure to individuals, so you could massively crowdsource an investment.
How do we get this started? What would it take from Investors, entrepeneurs, lawyers, and (currently) small business owners?
Your last paragraph hits all my feelings about the current financial situation on the head. EXCEPT people have been profiting from new technologies and companies without VCs. It takes a gigantic effort, and that's what I see as being the deterrent.
Without major backing it can take a very long time to get the momentum needed to go from idea to business. I think that refactoring the way that companies are backed is in order (not that the current system is bad, it just doesn't help out those who are independent of investors).
Would it be possible to gather an open community of independent thinkers, investors, and entrepreneurs for this? A cross between public investment, Y-Combinator and Kiva?
Something like this would be wonderful for the grey area between 'startups' and 'small businesses' who have higher aspirations, but aren't looking for the normal VC to Exit models.
In general we're moving into times where we need to be much better at leveraging social and human capital in addition to financial capital. This works well in orgs that have a more 'open' type of organization but can also be done by more conventional ventures.
Investing, using, and getting rewarded for contributing this type of capital is what we are moving more actively toward - and I think that is more appropriate than tweaking accredited investor guidelines.
Just posted a quick primer on what I'm thinking on my blog for any that are interested.
Thanks again for your continued posts (contributions)... this one example of how you invest with and benefit from non-financial capital as do all those that participate in this or any other blog or conversational media.
(@igniter) and we'll get to it.
Aaron
See real estate. See stocks. See Auction rate securities. See Subprime MBS securities. All I hear is how people did not understand what they were investing in. If you don't understand it don't invest in it.
All this idea would do is encourage people to chase returns. If you do not have $1M in net worth and $200k in income, you really should not be investing in firms with very few accounting controls.
Really, if you have less than a $1M net worth, you should not be investing in individual stocks period (outside of your comp of course). The risk is not worth the return.
no easy answer.
Thanks for the inspiring post. I think there are ways for average investors to tap into portfolio companies, but now is not the right time. I think SPACs, or special acquisition companies, have gained popularity in Private Equity and could be a great vehicle for Venture Capital. I know these types of equity vehicles had a bad run during the 90's, but they could be very powerful in the right hands.
Finally, does anyone know if it is possible for a VC firm to have a public offering set-up similar to PE firms who went public?
AR&D was public
I am interested to know why more VC firms don't pursue this. Would their be too many regulatory hurdles?
I once invented a breakthrough anti-paranormal technology and some the EPA shut down my partners' small business and unleashed havoc in the streets of New York.
Unintended by whom?
Besides, intent is only relevant as a proxy to help determine whether someone is likely to do something again. When someone(s) repeatedly do something that has a given result, it's absurd to give them a pass because they supposedly didn't "intend" that result.
https://pcmexchange.com/
While it doesn't solve the accredited issue, it does provide a way for private companies to raise money without the regulation of going public. It also allows investors to trade the stocks of these companies.
Seems like a good idea. We are considering it for our own start-up.
The fact that they credit their web design firm at the bottom of the page is a subtle error that screams volumes. "Designed, developed and maintained by Interactive Media Associates." Excuse me? That's an SEO firm.
As for accessibility, notes:
1. When you click the original url https://pcmexchange.com/ it gives my Firefox client some SSL security error and forces me to go to https://www.pcmexchange.com.
2. I'm never a fan of lots of text on the homepage, especially if it's in a small font size.
Blimey, I haven't heard anyone claiming that the failure of CDS, Subprime, and all our general malaise would have somehow been better if only there were LESS regulation. Isn't it more the case that problems happen when schemes invented to try to circumvent bothersome "Rules" and "Laws" come unravelled precisely because they did?
"Secondary markets in Private Equity" sounds like a term I might be hearing about as the next big thing in financial disasters when we've forgotten all about Enron and moved on past Subprime.
Reality: going to be hard to pull off, but will happen. won't happen extremely fast, but inevitably, I can see this existing.
Angelsoft, Advanced Equities International (AEI), angel groups, and my own network give me access to investment opportunities, but being able to spread the investment opportunity over many players than over a few is mutually beneficial as noted above... from a startup perspective, limits risk of investors hitting financial hardships, and from an investor standpoint, gives access to many deals with potentially better information on them because there is more investment knowledge to be shared (wikipedia for investment opportunities anyone?)
I love the vision as an angel investor and entrepreneur.
also much less pesky regulations about insider trading, ramping stocks.
I work in a technology incubator and regularly attend Angel and VC meetings in our region, in addition to coaching entrepreneurs on how to get in front of same. From time to time I come across companies that I wouldn't mind putting a couple grand into, but can't for many of the same reasons.
In today's age of Twitter, social networks and online communities - I just wonder if it wouldn't be easier for an entrepreneur with a great business model to raise 400 $1,000 investement versus a one time $400K Angel investment. Obviously the backend accounting and legal for something like that would be a nightmare, but there has to be a way to satisfy Washington's interest in consumer protection with the consumers interest in taking a well understood risk.
BTB, I am not a expert and dont understand the regulations, so this maybe a stupid idea!
Think of it this way: the market is basically saying that based on past history, these "exits" didn't make sense for investors who ultimately funded them (either by buying into IPOs or by holding stock in public companies that did the acquisitions, funding exits).
You have yourself pointed out how many of your portfolio companies that got acquired ended up destroying value. Whatever the cause of that is - contrary to what many people believe, I think there are faults on both sides - honestly, how many founders actually *wanted* to stick around and deliver the value to the acquirer, once they already encashed that value for themselves? - the market's verdict is clear. We will likely face a generation of really low valuations. Trust needs to be rebuilt very slowly.
It is an existential problem: the very fact that exits are available made everything think short term, and focus on the exit, indeed, even build companies for the exit i.e build-to-flip. Once people started building such exit focused companies, those became less and less valuable to the public as well as acquirers, because what you have are founders and employees who want to take the money and run.
Think of it this way: if an investment bank comes in and acquires your entire portfolio for 2 or 3x the money that went in (based on your historic track-record), and they do this as soon as you finish a funding round, what is the rational incentive for you to sit and nurture your portfolio? You can simply start funds serially, "put the money to work" fast, and flip it to an IB (which would then flip it to some petro-fund or whatever). What would be the quality of your portfolio under such a system?
That's in effect what has happened at the start-up level. I live in silicon valley, and I am amazed at the bubble-thinking of an entire generation of people, still chasing "the dream" - the dream of a fat exit from a sucker. Alas, the supply of suckers turns out to be limited.
Sorry for the long rant ...
Your exit strategy should be a business that generates cash.
The problem is not the lack of investment opportunities. It is the VC model. You do not need an exit if your time horizon is more than 5 - 10 years.
I know Fred's funds do well, but most VC funds perform poorly.
But many of our portfolio companies have built large and sustainable and
very profitable businesses given enough time
It often takes 5-10 years to do that
Patience is required for sure!
(google "Securitizing Happiness")
So, as a web technologist who likes designing and implementing web applications, what is required from a legal stand point to make a legal secondary market?
For long I have been thinking of a way to push the micro-financing model for angel funding and maintain accountability and some regulations. Though I do believe that later rounds should come from bigger VCs for all the support they bring in, the initial rounds which most do raise from friends and family is better off remaining with individuals pooling together to fund 50K for a startup. Saves time and effort for founders, if people who are pooling in are excited about the idea they would pitch in for morale and suggestions too.
A related thread here on g[x]ooglers pooling to fund startups of ex-google.
http://news.ycombinator.com/item?id=363509
Amazing. Seriously, I have always wondered why isn't the solution for all the financial worries of startups and the VC play.
This is the "change" that would make a lot of things easier, ensure startups keep up their momentum and not waste in VC fund raising process. More you have angels who are truly angels backing founders. (I understand this can hurt lest rational thinking is lost)
Micro financing at angel level (be it 5 friends/colleagues or more) is great. Someone needs to institutionalize this or have some learnings on how to deal with accountability, resolving dispute and the like.
For people in India, Israel, Ukraine and the rest of east Europe the startup costs are quite low. $100K is like close to upper end angel funding.
I know of at least 6-7 ex-Trilogy startups in India - brilliant guys, doing it right, when it comes to funds Indian VCs are most risk averse they wouldn't invest in anything other than jobs, matrimony, real estate and travel. I have always wondered why would it really bother for couple of ex-Trilogy in US to invest. For 2 guys to put something like $50K it would be hardly anything.
Then investors can get behind this idea
I am planning to get this into action in India and raising investments from ex-colleagues in US/India as convertible debt. http://www.entrepreneur.com/money/financing/sta...
Keeping it to the close community of ex-colleagues makes it more convincing for people to invest reducing the risk around evaluating competency, trust etc - additionally helps the startups to get involvement from past colleagues who could be experts in varied aspects.
As you said innovating here needs that I as an entrepreneur be much aware of the regulatory measures I put down there. Would you suggest to work with a current investment firm or if I can ask would you be interested to help me out. :)
However it is possible to build great companies out of India serving for the bigger markets of US, europe etc at very low costs. Most startups with 3-5 people can operate with low operational costs (incl personal expenses of founders) less than $2000 a month. So something like $20K funding will free up these startups for well into a year to work peaceful and execute well. And $20K for past colleagues from US is peanuts.
I think Indian successes and entrepreneurial environment was vastly dominated by traditional services model till now and recently there has been a new wave of young folks with experiences working with their US counterparts who are really innovating and dare to launch new products and ideas at their own costs. Sadly, I think the VC firms don't have much decision power here or have lost hopes with success out of India except for traditional markets. So all of these companies are bound to struggle with financial crunch.
You might want to check out www.ASSOB.com.au for soem ideas.
Cheers,
Dean Collins
The entire issue of retail-level investors (not angel investors) investing in private companies/startups could be subdivided into three stages:
1. money transfer from individual/retail investors
2. management of collected sums/fund
3. investment of the fund money into companies
Parts 1. and 2. were superbly executed during the Obama campaign (for example see http://bit.ly/kwQ0). The collection part worked just fine. The channeling part of collected donations/sums was subsequently EFFICIENTLY spent/invested. Same principle, i think, only details are different.
The main difference will come here in part 3. Regulatory part comes in here.
Btu as said above, there is a huge market need and the market is familiar with individual financing/loans/lending/donations systems through kiva, zopa and election campaigns. Perhaps something can be done in terms of introducing some kind of legal/regulatory framework for such an idea to be implemented.
That is why I don´t see a big benefit in investing in small companies that can not get VC funding unless those investments come with some specific competences and contacts that can help the company. In my view simply receiving envelopes with money from all parts of the world would not generate better returns for investors than I believe investing in blue-chip stocks will in the long run. Add to that that you will have a big issue in terms of agency problems, i.e. how do you monitor the guys you invest in, if they are not in your proximity and you don´t have any say in their business decisions.
This is not to come across to gloomy because I do not think the VC model is perfect at all, however it serves the important purpose of usually having people with industry expertise select the most fit investments and in turn investors will only invest in the best-performing VC funds, so while I´m sure the current system can be improved I don´t think the current state of affairs is that bad.
I do NOT agree however that non-accredited investors should have access to these deals. That rule is there for a reason, and too many non-accredited investors would get hurt, or abused IMO
www.twitter.com/A_F
And conversely, they could cause enough inefficiency to negate the benefit of such an organism.
without being rude - I sometimes find americans very limited in their 'global' thinking about how to get things done.
Cheers,
Dean Collins
www.Cognation.net
You're making a brave stand by advocating less regulation rather than more given the current conventional wisdom. Of course you're completely right that all the regulations and all the regulators didn't see and didn't point out that the balance sheets of huge publicly traded financial corporations were balanced on nothing at all.
Perhaps the fiction of regulation even lulled us into false security while regulation has also barred the exit door for good smaller companies and their investors (panic hasn't helped with exits either).
I further riffed on your theme at http://blog.tomevslin.com/2008/11/a-time-withou...
the current regulations did not accomplish what they were engineered for.
a lot of ink had flowed to form the constructs as they were when this wide
failure became apparent.
Then to me, it stands to reason that I should be able to invest
where I see fit. The market will say yes or no.
If my money is no good, let USV say 'Thanks anyway, maybe next year".
Change is needed before SEC standards start looking like the horror
show that is our long tail tax code.
I'mnot proposing that, just asking.
Tom Evslin
blog: blog.tomevslin.com
novel: hackoff.com
latest: The Interpreter's Tale
Smaller Investment partners, it is easy to make a call, but with smaller investors pooling up and then to take a decision, it would be virtual nightmare, at as simple as it is said in theory.
From the beginning of 2008, I started thinking solutions for this, in more serious level. On July I got an idea for an overall solution and started working on the business model for Venture Capital 2.0. At that time I had not heard or read about wiki fund or Entrepreneur Commons. These posts I have discovered after, we started to work on this in more serious way.
While working on building our founders team for Grow VC and doing some other stealth mode activities and viral marketing, I have found these articles and to me these all just proves the great potential of our model version, that still remains as it's been since July (for the main concept and solutions).
We now have a great team of founders committed to setup our version of Venture Capital 2.0 service and are excited about all of this - I can't wait to get 2009 going. Lucky for me it's only few hours to new year ;)
I feel this model will get sorted one way or the other, the path seems "so clear". Will it be us or someone else that will eventually succeed, remains to be seen....