Essentially, the purpose of venture capital is to give startups the funding they need to execute their visions and reach a mass audience.
Traditionally, venture capital is reserved for high risk, high reward, early-stage startups. A VC will provide money, as well as strategic advising services in order to bring a company to IPO or an acquisition event.
The trend we’re seeing today is that startups need less and less money to build out a first version and find product / market fit. This in turn leads to companies raising smaller and smaller sized rounds.
A few years ago, building a technology company would cost at least $750k, require a full team of engineers, and several months of work.
Today, these same companies can be hacked together by two developers in a weekend using a few API’s and some open source code.
This means founders that would traditional go to venture capital firms for funding are instead seeking seed rounds from angel investors.
Angel investors are high net worth individuals (accredited investors) who provide capital for early stage startups. Angels invest a lot earlier than VC’s, and typically invest a much smaller amount of money.
This is offset by the amount of risk each is taking – angel investors take much more risk on their investments.
In terms of speed, closing angel investments are a lot quicker than closing an investment from a venture fund.
Venture funds usually have multiple partners that need to be pitched and a general consensus needs to be made on an investment before it can go through – this can take weeks, and sometimes even months. An angel can write a check immeditely if they get a good vibe.
Another recent development in the fundraising world is the passing of the JOBS act. Now, startups are allowed to publicly announce their fundraising – something that was previously illegal.
Investors are also allowed to publicly announce the companies they invest, which has enabled some of the top angel investors to gain a following based on their continual successful investments.
With this influence, these super angels are now to be able to push millions of dollars to a startup simply by making a small investment of their own and sharing that information with the public.
Currently these transactions are facilitated almost exclusively by one company – Angel List.
Angel List is single handedly disrupting the way venture capital works in the startup community.
Not only is it a frictionless platform to connect with investors and accept their money, but they’ve also rolled out a new set of features relating to the JOBS act called “syndicates”.
Syndicates allows investors to have “backers”. These backers trust a specific investors strategy in picking startups, and opts to follow them on any investment they make.
If you get an investment from one of these super angels for $25,000, you will likely see $1m + in follow-on investments.
What this means for VC is that Jason, a single human, is now a mini VC fund.
Through him, and people like him, you can raise more than enough money to build your company, and you can do it quicker, and probably on better terms than through a VC fund.
At this point in time $1 M is enough for a seed round, but very successful companies raising $50m+ Series B would still need access to venture capital due to the amount of money they need.
As this new investment “backers” infrastructure matures, it’s likely that more and more people will turn to investing in startups because they now have access to deals they previously had no way of investing in.
If we have people today with over $1m of ‘follow on’ investments, it’s not crazy to think that we could see angels with $10m in follow on investments in a couple of years.
For already successful companies, it may be possible to raise $10 M or more simply by appealing to the community. If we’re able to crowd fund that amount of money, then the Venture Capital model may start to lose its importance in the ecosystem.
Kickstarter is a great example of crowd funding in action – and it may be an early indication of what we’ll see in the future with venture capital.
The pre-funding or crowd funding model is gaining a massive amount traction, and seems to be the most effective way to raise funds and gain traction for a pre-launched product.
The issue with KickStarter in the venture capital space is that you can only pre-order products, you can’t fundraise by selling equity.
Selling equity in a company can become quite complicated, especially if you have 1,000 investors each putting up different amounts of money for different amounts of equity – it can definitely get sticky.
WeFunder is a company that is trying to tackle this problem – but it’s a very tough space to navigate as there is so much red tape setup from the US government and investing regulations.
Operating in the existing ecosystem will not work if we want to achieve a system with maximum efficiency.
That said, there are a few technologies existing today that are poised to completely disrupt the investment space in the next 10 years.
I have a feeling that bitcoin and decentralized crypto currencies will play a huge role in the future of venture capital.
There are two sides to the story with bitcoin and venture capital:
The first is the ability to invest in companies using bitcoin because it’s not under the same regulations that USD is.
The second is a technology layer being built top of the bitcoin protocol which is designed specifically to make trading securities easy.
Since bitcoin is decentralized, there is no regulation regarding who and where you send them. At this time, anyone can purchase BTC with USD, and then invest that BTC into a company of your choosing (that accepts bitcoin as an investment vehicle).
I don’t need to be an accredited investor, and there is no legal minimum investment size.
Havelock Investments is a startup spearheading the bitcoin IPO space. They’re an exchange that allows anyone to buy and sell equity in these companies using Bitcoin.
After the IPO is over, the shares can be bought or sold at anytime through Havelock on the public market.
Dividends are paid automatically to your bitcoin address, if any are to be given out (outlined in the companies IPO prospectus). Some companies payout dividends, while others don’t have a dividend structure.
One interesting company that IPO’d on Havelock recently is The Seed Fund I (disclosure: I’m an investor).
The Seed Fund will be using money from their IPO to re-invest into 14 different Bitcoin related startups per year, which they will then help advise / incubate.
The Seed Fund sold 500 BTC worth of shares in the first 2 days of it’s IPO – around $450,000 USD, and is in the process of selling another 500 BTC.
Shares were sold at .001 BTC each, meaning you could purchase anywhere from a few dollars, to hundreds of thousands of dollars worth of shares.
The BTC collected from the IPO is then instantly converted back into USD in order to preserve it’s value for SeedFund, BTC is still a bit to volatile.
Another reason the BTC is converted into USD is because most companies still need to pay for things in USD (employees, rent, hosting etc).
While raising money in BTC is ideal because it gets around all of the sticky investment laws, running a company entirely on BTC is not quite there yet.
One very interesting concept which may solve this problem is called Colored Coins:
Colored Coins are a revolutionary concept in the early stages of being integrated into Bitcoin and other cryptocurrencies.
Colored Coins lets you send assets like shares, bonds and commodities as easily as you can send & trade a bitcoin.
Lets say you have a car, and they’re loaning you 1/2 the money. Currently, you’d write up a contract, and then the asset would techincally be split in half.
If you wanted to then sell 2/3 of your ownership of 1/2 of the car, things get tricky. So tricky, that people wouldn’t even consider doing that.
With colored coins, you would designate a total amount for the car – say 10 BTC. That 10 BTC would then be “colored’, and the colored coins would be split between the two owners.
With these coins, you could technically sell & trade your assets however you like. If at some point you want a little more spending money, you could trade a 3rd friend 2.5 colored coins (car asset) for USD cash. You could even trade car colored coins for colored coin shares of some other asset (his house, maybe).
The expansion of this idea is to essentially create a company using Colored Coins and trade that asset / shares to anyone interested in purchasing them.
You could find traditional investors and keep the offering private, or you could reach out to the community and see if the idea could be crowd funded
Colored Coins allow for the terms to be automatically built into the coins you’re purchasing. Dividends would be paid out automatically. Voting rights could be included as well. All trades are completely public, transparent, and fully decentralized.
If at any point in time you want to sell your shares, you can do so – simply put out a market order and sell your equity to someone with a order to buy.
This is already happening on a very small scale – on forums across the internet people are creating these mini – ipo’s using bitcoin.
I’ve purchased into quite a few companies who have been looking for funding with Bitcoin. One recently that looks promising is BitBay – a cryptocurrency exchange.
What I see colored coins doing is essentially organizing this behavior into a programmable protocol, built on top of the decentralized networks created by cryptocurrencies.
With colored coins, these ‘companies’ will exist entirely in the blockchain, and will not need to be registered with any governmental agency.
It’s the wild west right now, but things are evolving quickly. We are slowly becoming a global economy.
I have a feeling that venture capital as we know it today is on its way out. Maybe not anytime soon, but once ‘the people’ get organized and the infrasturcture is there to support this type of investing, we will see a paradigm shift in how things work.
I believe that startups will raise money by appealing to the community & specific thought leaders. Thousands or even millions of people will purchase different amounts of equity using the colored coins feature in bitcoins or another crypto currency.
That would be really cool – I hope it becomes a reality.