June 18, 2013
VA Angels’ CEO Randy Thompson writes a column for the Calgary Herald. This is one of the articles.
February 8, 2013. 12:16 pm
You only have to wait a few years before the “new fad” in financing strategies appears. Some of these fads become legitimized and stick with us, becoming trends and others – well they’re fads…
If you are in the Energy sector, this isn’t as big an issue. In the Energy sector you have more standardized methodologies when you raise capital, standard term sheets, valuations, ways to use public markets etc. You pretty much know that your outcome is binary, and identified to you in a short period of time.
We are missing this in tech, partly because of the “1 in 99” rule with VC’s (1 in 99 get funded), but mostly because of the length of time it takes before the idea becomes reality and the reality equals revenue. This distance from idea to revenue is too great an obstacle for most savvy investors. Therefore, it leaves the tech entrepreneur no choice but to be extraordinarily creative (think racetracks and casinos) about how to keep ga (money) in the tank (company) during this “valley of death”.
This leads some tech entrepreneurs to check out the latest fad – crowdfunding.
I’m going to cut right to the chase and give you four reasons why this won’t stick as a financing vehicle for tech entrepreneurs – At least the serious ones.
1) Great for not for profit projects, not for equity rounds: Having been in tech finance for a decade now, I see patterns. One of these patterns is that a tech company goes through up to six rounds of funding and gets sold for $40-80M 75% of the time (note: Exit prices are significantly lower than this in the Interweb space). Think about a crowdfunded company. Do they ask their people for money six times? Or do they take their 1000 investors cap table to a VC and say “can you work with this?” Neither are good!
2) 80% of crowdfunded projects are late or worse: Smart money helps entrepreneurs become business people instead of idea people. There is no mentor capital in crowdfunding. You are letting the inmates run the asylum, with no oversight.
3) The Vancouver Stock Exchange: The brokerage community has seen crowdfunding before, in the 70’s it was called the Vancouver Stock Exchange (VSE). Famous names like Pezim, Skalbania, etc have spent a lifetime managing the savings of unsophisticated investors. I predict that if the crowdfunding fad does become a trend, we’re in for a second generation of the VSE.
4) Building Great Companies starts at the Exit not at the launch: I think crowdfunding might separate the first time entrepreneur from the savvy business person. If I could go back and do my first company over, work my financing strategy, build my advisor/mentor pool over, learn to be the business person instead of the guy with a great idea… wow. Building a company from exit backwards is a whole other article, but let me just say that crowdfunding is a one shot deal at the fundraising casino.
A couple of years ago, the movement in tech financing was trending away from VC financing and towards smaller funds, or even to go direct to the super angels. This fad became a good trend (in my opinion), and now is institutionalized to the point where Henry Blodgett announced “the A round is dead as a VC funding tool” at a conference I was at in New York last year. This movement was disruptive in a good way, and came from a place that realized the VC model was broken, but there were other ways for investors to build great companies.
Crowdfunding is not about the exits or building great companies, it’s about entrepreneurs working from the place where they need money now, and we will worry about the exit later. Crowdfunding is the entrepreneur worrying about building product, not about returns for the people around them.