The Securities and Exchange Commission has yet to introduce regulatory guidelines for equity-based crowdfunding, but that hasn’t stopped some of the region’s venture capitalists from contemplating how it might impact their business.
Crowdfunding allows entrepreneurs to collect small sums of money via the Internet from everyday people who then become investors in their business. On its face, the practice seems to pose a threat to traditional venture capital firms that will face new competition for the best deals.
That’s not necessarily the case, some say. Capital Business spoke with several local investors to get their take on what equity-based crowdfunding means for the industry. Here’s what they had to say.
Charles Curran, general partner, Valhalla.
Curran made 10 trips to Seattle to visit Qumulo, an enterprise data start-up, before sinking $500,000 into the company. His firm, Vienna-based Valhalla Partners, then helped the young firm raise a heftier second round.
The legwork, Curran said, was as much an effort to sell Valhalla’s credentials to the start-up company as it was ensuring the company itself was a worthwhile investment. As crowdfunding becomes a reality, closing a deal may take an even stronger effort.
“The input is certainly more time intensive and expensive,” Curran said.
Curran adds that simply holding the checkbook is no longer enough when it comes to closing a deal. Investors have to demonstrate they’ve got more than money to offer, whether its the ability to recruit skilled workers or make introductions to potential customers.
“We’re needing to prove our worth rather than just being smart investors because the investing part of what we’re doing is being democratized,” he said.
Prashanth V. “PV” Boccasam, general partner, Novak Biddle.
Boccasam said he expects crowdfunding will apply to a segment of businesses that would be unlikely to attract venture capital, such as a restaurant or toymaker.
“Can you create the next university? Can you create the next security company that can prevent any kind of attack on our critical infrastructure?” Boccasam asked. “You’re not going to get those crowdfunded. You just won’t. You just can’t.”
And those big-idea companies should shy away from crowdfunding anyway, the partner at Bethesda-based Novak Biddle cautioned, because inexperienced investors may have a lower risk tolerance. Venture capitalists plan for start-ups to face struggles and have the patience to work through them, Boccasam said.
“Entrepreneurs learn the hard way that cheap money ends up being the most expensive money,” he said.
Elana Fine, managing director, University of Maryland’s Dingman Center for Entrepreneurship.
Angel investors, the term for those who provide companies with their initial financial support, could be made the most vulnerable by crowdfunding. They provide small amounts of money that entrepreneurs could decide to raise from the public instead.
But Fine doesn’t see it that way.
Crowdfunding may supplement the money that angel investors supply to fledgling ventures, rather than replace it, by providing a platform for many otherwise-fragmented angel investors to combine their investments, she said.
“It’s probably more helpful to the angel community than harmful because there is the additional network they can use to round out the deal,” Fine said.
Mark Heesen, president, National Venture Capital Association.
As president of the industry’s leading association, Heesen has seen the alternatives to venture capital expand over the years.
That’s a good thing, Heesen said, because only a small number of companies meets the criteria for venture capital, and even fewer secure money.
“If you’re an entrepreneur and deciding which way to go, which sources of income you should be trying to get, I think you’re looking at venture capital if you’re an entrepreneur who believes that his or her idea is a blockbuster idea that’s going to need a lot of capital over a long period of time,” Heesen said.
But blockbuster companies are few and far between. If crowdfunding gives rise to a slew of new companies, as advocates expect, Heesen said many of those firms may not receive additional money from venture capitalists that they would need to grow the business.
“It could produce a heck of a lot of companies that should not have been created in the first place because they’re not going to get that second round,” Heesen said. “The question is, who wins in that situation? The entrepreneur has learned a lot of lessons. But does the [funder] ... come out okay at the end of the day?”