Startup Founders Can Now Bypass Venture Capitalists with Crowdfunding (protocol.com) 32
This week Protocol.com's "Source Code" newsletter described how startup founders could now bypass venture capitalists:
Last fall, the the U.S. Securities and Exchange Commission passed a new set of rules for "exempt offerings," which allow startups to raise funds by selling securities. The SEC acknowledged that its exempt offering rules had become "overly complex" and tried to make them simpler to understand. The new rules increase the amount of money a startup can raise through regulation crowdfunding, which works like ordinary Kickstarter-style crowdfunding but involves selling equity instead of products and thus comes with many more rules attached (though not nearly as many as would apply to your average public company). Reg CF, as it's known, used to allow a company to sell a maximum of only $1.07 million in securities every year. Starting Monday, that number jumped to $5 million a year.
The rules also allow startups to "test the waters," which means they can talk much more publicly about raising money without actually raising money.
These rule changes are probably going to make VCs crazy, since now there are easy ways to loop them out of the super-early fundraising that often brings the biggest windfalls.
They also note that Sahil Lavingia, the CEO of commerce platform Gumroad, just raised $5 million in new funding. "He's also hoping that this model — start with a lead investor who negotiates and does due diligence, then offer the same terms to the general public — becomes a go-to move for startups everywhere.
"It certainly worked for Gumroad. It hit $5 million in less than a day, with the money coming from 7,513 investors."
The rules also allow startups to "test the waters," which means they can talk much more publicly about raising money without actually raising money.
These rule changes are probably going to make VCs crazy, since now there are easy ways to loop them out of the super-early fundraising that often brings the biggest windfalls.
They also note that Sahil Lavingia, the CEO of commerce platform Gumroad, just raised $5 million in new funding. "He's also hoping that this model — start with a lead investor who negotiates and does due diligence, then offer the same terms to the general public — becomes a go-to move for startups everywhere.
"It certainly worked for Gumroad. It hit $5 million in less than a day, with the money coming from 7,513 investors."
This will be abused (Score:3)
This will be abused by unscrupulous scoundrels (like Solar Freakin' Roadways [ecavo.com]). And yet, capitalist investors have been abusing startups for decades, stealing from them in totally legal ways [cnet.com].
This takes some power out of the capitalists and puts it in the hands of the people. A totally practical, yet communist/anarchist thing to do. Power to the people, and all that.
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It's a bad idea even in the absence of abuse. Frankly, I'd love to see stock security ownership rules tightened up substantially. They should be vehicles to aid in active investment and management, including employee ownership, not mechanisms for gambling. If you don't work for a company or sit on the board, what the hell good does it do the company for you to own shares? What distinguishes your involvement and intended outcome from buying a lottery ticket?
Re:This will be abused (Score:5, Interesting)
If you don't work for a company or sit on the board, what the hell good does it do the company for you to own shares?
I get dividends.
What distinguishes your involvement and intended outcome from buying a lottery ticket?
Lottery tickets are luck. Buying stock is not.
If you're day trading, that's closer to pure luck. But investing is not like a lottery ticket.
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Your getting dividends isn't good for the company. It just deprives it of money that could be reinvested into the business or held as a reserve in case of emergencies.
And you're probably not investing in the company either. You're just speculating.
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LOL you definitely have your own opinions, and they will not be swayed by fact. Carry on, my wayward friend.
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So you don't like dividends and you don't like people buying and selling stock- why do you think anyone should ever provide capitol to a new company? You do it because you expect to make more money. Which requires either selling your ownership stake when its worth more, or requires dividends.
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Ditto. Yes, it's possible to do stocks in a sane way. We get around 10% of our income from the stocks we own. Haven't bought or sold any in the last decade, I think....
Re:This will be abused (Score:4, Insightful)
They should be vehicles to aid in active investment and management
Thats exactly what they are. The initial shares were sold, as in investment, for cash that was needed, in order to manage the enterprise.
....and please explain why exactly it is that you think its cool to stick your nose into these transactions... condemn them... call them gambling... while amazingly
not demonstrating even a basic understanding of the domain that you are screeching about....? Whats the deal man?
That later on, these shares change hands, because the share holders found someone that valued the shares more than they would... WHATS THE PROBLEM?
Is it the size of the stock market that has blown you off the rails? Is that what it is? Yeah.. its huge.. because a lot of that investment stuff has happened.. Its never been bigger.. ever.. and its not gonna get smaller any time soon, and no you dont get to nanny filter it, imposing your morality onto the victims of your own ignorance
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The problem is that venture capitalists are just that: capitalists. There is a recurring trend towards Marxism in college culture in America. For this generation, it's rooted in the Marxist basis of the Frankfurt School of philosophy which is at the core of much of the identity politics of our time. Even if you notice the origins, and point out the historical ironies because Marxist societies have been involved in so much genocide and abuse of political, gender, or ethnic minorities, there is an ongoing bel
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in the Marxist basis of the Frankfurt School of philosophy which is at the core of much of the identity politics of our time.
How does the Marxist basis of the Frankfurt School of philosophy relate to identity politics? I'm not seeing the connection.
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The Frankfurt School of philosophy was renamed "Critical Theory" and is a major philosophical factor of third-wave feminism. It is taught as a degree program for "feminist studies" in colleges across the USA.
* https://www.jstor.org/stable/4... [jstor.org]
* https://www.oxfordbibliographi... [oxfordbibliographies.com]
If I believed that people change labels to hide the reality of their identity, I might be suspicious of the renaming from "Frankfurt School" to "Critical Theory". It helps conceal the Marxist roots of the ideology from the people who
Re: This will be abused (Score:2)
Ok, grandpa
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I'll admit that I've been asked to pay for tuition, and to applaud the excited Marxist ideology of some very active far left wing youngsters. Introducing them to educated women, racial minorities, or sexual minorities who've lived under Marxist regimes shocks them, though I don't know as many of those as I used to: the pandemic is making it more difficult to stay in touch with people of distinct backgrounds and politics.
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They should be vehicles to aid in active investment and management
They do - the initial selling of the shares raises capital for the company. The ownership of the shares even if they change hands usually have some voting rights set by the companies own bylaws within the scope of SEC rules.
Its not the systems fault you are to lazy to listen to the share holders meeting / call and participate in proxy votes etc.
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I'm not sure Venture Capital previously ran into fewer fraudsters than are currently on kickstarter and the like.
That's a good question. My observation is that fraudsters who get money from venture capital are people who actually believe their own fraud (like Elizabeth Holmes, as far as I can tell she was completely sincere and fooled herself).
Re: This will be abused (Score:3)
True. There are so many VC funded startups who start investing in "other startups" without reaching anywhere near profitability ! How do the boards /shareholders even listen to such a thing.
But all the large shareholders in startups are pretty much in the same boat as the founders if they realize the product / service is not gonna work out - they want to try anything that might work with the money left and/or fool other investors into coming in so that some "pivot" can be tried to salvage their investment.
T
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Many venture capitalists are not spending, or risking, their own money. They're skimming a share off their clients' money and, ideally, passing the rest to the startups. Like high frequency trading and other forms of arbitrage, they don't have to make a net profit from the actual difference between money invested and money returned to investors, they're skimming the transactions themselves.
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Elizabeth Holmes and her colleagues knew very well that they were committing fraud, very early. It's evident from exposure and analysis of their initial testing data, and fraudulent claims about how many tests they'd already managed to perfect. The belief that "we'll make this up next quarter" is very popular among startups. It's also why I'm not permitted to speak at certain meetings with partners or clients: my colleagues who write the contracts are aware of the nonsense, and make certain not to buy into
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This takes some power out of the capitalists and puts it in the hands of the people. A totally practical, yet communist/anarchist thing to do.
Actually, it's a capitalist-anarchist thing to do. (That's a subset of the individuaist - anarchist side of the individualist - collectivist split of the (appropriately chaotic) anarchist factions)
Here's a guide to the factions' flags [wikimedia.org]
(Note on the odd formatting: Tight hyphenaton of individuaist - anarchist and individualist - collectivist caused the lameness filter
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I would say no, because it still includes government regulation to keep parties from taking advantage of each other.
In any case I would clarify that I think it's anarchist in the sense of removing (in this case, weakening) illegitimate power structures. VCs have been weakened and individuals have been empowered.
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You're looking at it from the wrong side, no longer do you have to be super-rich to be a VC.
Re: This will be abused (Score:2)
This takes some power out of the capitalists and puts it in the hands of the people. A totally practical, yet communist/anarchist thing to do. Power to the people, and all that.
I have an excellent investment opportunity open to the general public, I'm going to sell bridges... err People's Bridge Co! Let's stick it to the uhh "capitalists", just write your email down on the back of a hundy and stuff it in the box, my assistant will send you a receipt and instructions for collecting your shares. PS I'm tots not a capitalist, I mean these bridges practically sell themselves, step right up comrade, or sir, whatever, uh for the people!
There's SEC oversight and mandatory disclosures (Score:4, Insightful)
I've done some small-scale equity investing, but it's very hard to find good opportunities: 99% of the decent opportunities require $1M minimum to participate. Part of the reason is to filter out idiots and ensure the investor pool knows the risks involved and how best to manage them.
The thing is, I have that knowledge, but nothing close to $1M in cash lying around. Fortunately, there are several niches that welcome smaller equity investors, but they are wary: The affidavits they want you to sign stack up fairly high, mainly because they need to protect their own business and reputation.
I am greatly looking forward to these changes! And I predict Kahn Academy will soon have a course on these new SEC rules for small-scale equity investing.
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expect marketing lies (Score:3)
Getting average people to invest will involve massive costly ad campaigns that does zero to further a business's products. We've gone full meta, being in business is now a primary business model. Raising capital in order to raise capital. This is a house of cards, and it is going to be extremely annoying to watch for the next dozen years.
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Honestly it blurs the distinction as to what is a public company and what isn't as well. I don't see this as good thing. We drew some initial brights lines for a reason; to help prevent fraud and create a shared set of understood rules.
we left private equity investment to supposedly 'sophisticated' VC guys for good reasons. The reality is those guys might not actually be more sophisticated than others but they have money they can 1) afford to lose and 2) more money to chase after the original money in court
Re: expect marketing lies (Score:2)
:) Raising capital to raise capital !
The current costs of running a kickstarter or indiegogo campaign has resulted in this niche where you fund & mentor a start up's crowdfunding campaign for $ 50-100k and exit once/ if the campaign is successful.
At least that's my current angel funding philosophy, after having failed at everything else more long term than this
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isn't this how the roaring twenties (Score:1)