Is VC crowdfunding the future of venture capital?
Angel investors traditionally have two pathways to buy into new enterprise. They put their money into a fund which seeks out high risk, high return projects; or they find projects and do due diligence themselves.
Some venture capitalists, observing the crowdfunding model, are exploring avenues to exploit the global reach the internet and social media provide. One such venture capital group, the Israeli startup platform OurCrowd, brings together venture capital and angel investment strategies into a new model for equity crowdfunding.
OurCrowd claims to curate best in market projects, does the due diligence, and provides initial capital investment to set projects in motion. Hereafter, they raise the balance of funds through their own global, sophisticated investor network, via their own crowdfunding equity platform. The platform allows these investors to review a range of projects available, and choose the ones they like.
OurCrowd have hit their capital raising target in all of the 32 projects they’ve engaged in their first year of operation. Furthermore, 12 of these have gone on to raise subsequent rounds of funding at higher valuations from institutions and larger companies. GE Capital have invested several million dollars into OurCrowd, in effect taking a portfolio reserve interest because they like the rigor and discipline applied to OurCrowd’s due diligence.
So, what are the implications and possible trends of VC crowdfunding?
- Other venture capital firms will follow. This model of distributing financial risk through an expanding, global, sophisticated investor crowd will create new investor markets.
- Sophisticated investor peer groups will consolidate, composed of new, high net worth individuals from a variety of backgrounds.
- Due diligence will be outsourced. Institutional investors and large companies will seek out equity crowdfunding platforms that source best-in-market innovations and provide first class due diligence.
- Due diligence will be crowdsourced. Equity crowdfunding platforms will increasingly draw on the expertise of their tribe of sophisticated investors to identify holes and hidden opportunities in startup projects. OurCrowd’s current network is composed of 4000 individuals in 53 countries. Such diversity will offer insights and expertise as to how globally scalable projects could work in a variety of markets.
- Big new ideas will be run by the wealthy status quo. Whilst there are good reasons for young projects to be run by more conventional wisdom, there is a risk that once in the hands of ‘the money men’, good grass roots ideas to drive innovation could be being drowned out by ‘smarter’, ‘more experienced’ people.
- Globally distributed tribes will pool their capital. Web 2.0 has lowered the barriers of geography. People of cultural, political, social and linguistic persuasions are more accessible and connected than ever before. Expect to see the venture capitalists amongst them gather around capital raising platforms and projects that service specific interests.
- Projects that don’t meet venture capital criteria will not benefit. Startups with inexperienced directors who have no experience in the startup space will not get access to these opportunities. Projects need to display real traction by the time they get to venture capital crowdfunding platforms.
- Visionary investors will get the diamonds in the rough. With an expanding startup investment class, and more talent and capital from sophisticated investors enriching high grade opportunities, projects that don’t make the grade will be developed by passionate risk takers and true believers.
Whilst it may be argued that the OurCrowd model is more a new form of venture capital than a new form of crowdfunding, VC crowdfunding may be the new term used to describe this class of capital raising. However it may be classified, any new model that drives more capital into innovation bodes well for the startup industry.
What do you think? Is VC crowdfunding the future of venture capital?
Image Source: Quinn-Dombrowski