About two weeks ago, the story all over the web was that “Venture Capital is Dead.” Adeo Ressi, the founder of thefunded.com created this colossal movement through his presentation: The Canarie is Dead.
I read it and thought about posting snippets of the presentation and then tearing apart each slide.
Here’s the thing, though, Adeo is right. The VC model must be tinkered with.
Instead of immediately sounding off my ideas through a post, I decided to step back, gather the thoughts of others, and really think deeply about Adeo’s presentation.
Upon reflection, I firmly believe Adeo’s view of the VC sector was too broad. VC’s that focus on healthcare are obviously different than VC’s focusing on web 2.0. And while I feel some sub-sectors need to change, some are thriving. Some sub-sectors within venture capital are simply dominating in the area of returns (relative to the market and hedge fund performance).
My favorite analysis of Adeo’s presentation was from my friend, Mark Reiboldt, in his post discussing the changing VC landscape. I like Mark’s interpretation of Adeo’s presentation for two reasons: One, It’s backed with thorough reasoning, and two, the comment by Adeo is profoundly insightful.
In the comment section Adeo says, “The goal of this presentation was (1) to encourage Harvard professors (2) to work with students (3) on creating new ideas and new models for the venture capital industry. Schools are turning out students trained in a broken model – it’s like training mechanics who enter the workforce and break all of the cars that they work on.”
I don’t know if the Harvard Professors were encouraged, but myself and many other individuals have given it serious thought.
Unfortunately, I foresee many barriers that may arise when attempting to change the VC model. Off the top of my head, barriers would include: resistant VC’s, tentative institutional LP’s, too many differing ideas, no regulatory body that would implement the ideas, tradition, uncertainty, laws, regulation and the SEC.
However, I believe most of those barriers can be overcome over time. How long will it take? Who knows.
But let’s pretend for a second that you have free-range in your reformation idea. That is, your ideas for a new model won’t be affected by regulatory barriers, tradition or money.
If I were to dream up a “new” VC model it would revolve around one thing: people.
The current venture capital model puts the minority in control of the majority. I think that’s the model’s biggest problem.
What's wrong with this picture?
The world is changing in front of our eyes. (check out education 2.0)
It’s no longer about the power of one individual; instead it’s about the power of many individuals. Never before has mankind wielded such access to profound tools that connect the world. And yet, we’re still stuck in the old paradigm. We’re stuck in doing things for the sake of comfort.
Is it comfortable for me, a venture capitalist, to look at my profession and say, “Hey, there’s something wrong here. I’m in a broken profession.” No, it’s not. But, I’d rather be honest with myself, than deny the truth at the expense of thousands of entrepreneurs; and therefore, deny innovation.
So, I started by thinking hard about the flaws in the model that Adeo outlined:
- Successful business people often tire of the VC model and don’t raise funds
- Relevancy of networks diminishes over time
- Top companies often come from “outsiders”
- Relevant experience is highly situational
To that, I’ll add some observations that may be biproducts of these flaws:
- VC’s oftentimes don’t return calls
- VC’s don’t pay attention in presentations
To this these questions I did not ask myself, “What can one do to plug these holes;” but rather, “How did we get here.”
And so I went back to the very begining. Back to the roots of venture capital. It all started at American Research and Development (“ARD”).
Georges Doriot, the father of venture capital, is famous for saying “A team made up of the younger generation, with courage and inventiveness, together with older men of wisdom and experience, should bring success.”
I don’t think the VC fix-up job is for one small group; it’s a job for everyone. The young and old generation are critical elements of the transformation. A movement back to the roots of venture capital.
This deep reflection brought about the idea of The Wiki Fund.
The Wiki Fund proposes to solve this by adopting the following structure:
As you probably know, a wiki is an unusual communication mechanism that enables the organization of contributions to be edited in addition to the content itself. The current VC model is closed and to VC’s, their process cannot be edited. Each VC is running on a different program. The Wiki Fund proposes to open up these lines of communication.
Venture capital firms are currently made up of a small group of people. Each group possesses an exorbitant amount of power. They determine who gets funded or not, and that’s part of the reason they get paid so well–it’s because they’re usually (and hopefully) good at it.
But a three-person firm does not have the wisdom that lays within the hands of hundreds of people. So why not unleash this methodology and apply it to venture capital? After all, the VC sector invests in America’s foundation and future success.
Adeo suggests moving the VC sector from a fragmented field to a conglomerate one. He suggests cutting down the 4,800 firms to 1,000 firms.
I don’t think that’s the solution because, over time, we’ll become what we are today–a fragmented sector.
The Wiki Fund structure allows anyone, even Joe The Plumber, to become a venture capitalist.
So you’re proposing to build a huge Angel club?
No. To join an Angel Club you have to be an accredited investor (remember the barriers I spoke of). Even then, the minority (angels) control the majority (entrepreneurs).
So what is it?
A people powered venture capital fund. Simple, really.
Again, let’s take Joe The Plumber as an example. Let’s say he has $2,500 of extra cash that he wants to invest. Let’s also say his net worth isn’t close to one million, which is required by the SEC’s Rule 501 of Regulation D. By throwing away the SEC’s rule, he can now either invest in the market (and probably lose money), or invest it into a bootstrapped company that desperately needs the money. A bootstrapped company that Joe believes could be big.
Some may object that “$2,500 isn’t a lot of money. Who needs it?”
First, Y-Combinator seems to be doing quite well with their average investment at that range, and second, $2,500 is a lot of money to startups.
By enabling literally anyone to invest in any company, in one place, it puts the power of capital back into the hands of the majority. And, best yet, the entrerpreneur only has to go one place to raise this capital.
As a Wiki Fund investor, picture yourself scrolling through YouTube videos. It’s addicting. You find some great videos on YouTube. And of course, you are then pointed to related video costing you even more hours.
That’s exactly how a wiki fund would operate. Any investor can lounge around anytime and watch various pitches. If you like a startup, buy some stock in it. It’s that simple.
In a sense, it’s almost like the way 99designs.com is set up. There’s a direct transaction between the supplier and the buyer (there’s not middle man=VC firms).
Has this been thought of before? I’m certain it has.
But, more importantly why hasn’t it been acted upon? I think the idea is worth a try. And, if I had $2,500 sitting around, I’d probably invest it in startups rather than the public market.
So, in the end, what do I think of Adeo’s presentation? I think the world of it. It’s gotten many young (and hopefully old) minds to think about the future of venture capital.
He’s accomplished his goal of reaching young minds, and challenging them to change their ideas and create new models for the venture capital industry. Hopefully, an idea takes off that actually works.
I invite every reader to expand upon my idea or try breaking it.
Remember this would only apply to sub-sectors of venture capital. And, remember, the Wiki Fund is based on certain barriers being thrown out (money, legal, tradition). If you’re interested in figuring out how to break these barriers, I invite your comments, as well.
{ 35 comments… read them below or add one }
Interesting idea, and it probably has some potential. I agree that the old way of VCdom is outdated, especially in today’s world and economy – where not only is it possible to ‘bootstrap’ a startup on very little capital, but almost necessary as everybody’s belts tighten (including the VCs). It seems to me that right now (as well as historically), there is a huge gap between ‘funded’ startups and ‘bootstrapped’ startups. The bootstrappers, for the most part, get by on a shoestring, while the startups that happen to get noticed by a VC may get millions of dollars (for an investment that is, as far as I can tell, not usually worth nearly that much). So the bootstrappers scrape by on far less than they need, relying on $5000 or whatever loans from a parent or friend, and their startup may even fail from not having the minimum amount of funding necessary to keep it alive – while the funded startups have millions to play with (and waste). It seems like you are proposing a sort of happy medium, and from an entrepreneur’s point of view, that happy medium is very much needed.
Where I think your idea may currently fall short, however, is in generating enough actual interest from potential investors. It is fine for somebody who is an ‘experienced’ venture capitalist, who understands the business and knows the risks, and furthermore has millions of dollars to spare (or more), to spend some of that on a startup after going through the entire process (due diligence, etc.). It will be hard to convince the average working individual who has a decent savings account but who is not exactly wealthy, and who knows little to nothing about the business of startups, to invest in a risky startup instead of the conventional retirement account – even in today’s economy. There is a reason why bootstrapped startups generally rely on money from friends and family – it usually takes strong personal belief in a person or an idea before your average working Joe is willing to invest the little bit of money they have to spare.
Then again, I may be opining from my own personal viewpoint as an entrepreneur trying to bootstrap her startup with a few thousand dollars from a dedicated friend! I just think that while it is a great idea from the entrepreneur’s point of view, and may also be a great idea for your average Joe with a little bit of cash to invest, that there will be many details that will have to be worked out – and even then, who knows. I was invited a while ago to take part in VentureCorps, which operates on somewhat of the same basis as what you are proposing. It’s a little bit different – potential investors and even entrepreneurs themselves ‘vote’ on the startups they like, and the favorite gets a small amount of funding ($50,000) with the potential to get more. While not a bad idea, it didn’t really seem to fit in with my ideas about my startup, so I haven’t participated since I first joined and checked it out. I do think that a more happy medium between VC funding and bootstrapping is necessary, and that eventually, that happy medium will happen, as people like you start exploring all of the different options out there and as, therefore, the idea of investing small amounts in startups becomes more mainstream and more acceptable to Joe the Plumber. I might even be willing to participate in the Wiki Fund as an entrepreneur
In the meantime, I will keep working on my little startup with the little bit that I have…
Love the idea. Unfortunately, It violates securities laws designed to protect people who are not professional or “sophisticated” investors. Can’t be done in the current legal environment.
Exactly… I’d love to remove that barrier
for deal selection, this could work really well. it’s sort of what i do already. using my blog, i am able to tap into the collective wisdom of thousands about a sector or an idea. i agree that allowing all of these people into the process so they can participate in the upside is a great idea. i wrote about that here
http://www.avc.com/a_vc/2008/11/getting-a-piece.html
but i feel that post-investment management is the single most important role of the VC and a very big part of determining overall fund performance. selecting investments is certainly important, but managing them is even more important. and you need full-time experienced people doing that. i just don’t know how you get that in a wiki model.
I like how you’ve thought through this idea a bit. I also love Fred’s application of your concept to what he’s already doing.
I participated for a number of years in a site called CambrianHouse.com and one of the major ideas that came out of the community there was similar to what you talk about. Do a quick search through the forums on that site and you’ll see some really in depth discussion of what we affectionately called Crowd Funding.
I still love the concept. Think about Prosper meets idea funding and you get some pretty interesting things. Two other communities to look at are Vencorps.com (an off shoot of the Cambrian House community) and Youbethevc.com. They both apply some of what you’re talking about to selecting the right ideas.
The biggest problem I’ve seen with all of these “crowd” supported idea filtering/funding/supporting is that it’s difficult to find consensus in a crowd. If you have a crowd of people all donating $2500 to their favorite idea, then you’ll fund 10,000 ideas at $2500. The best ideas will be funded $5000 because they convinced there friend to fund it too. Point being that when you get the crowd together it’s hard to find a strong consensus on which idea deserves there $2500. It was done with virtual points on Cambrian House and it showed this problem very well.
One other thing that I think is a major challenge is identifying who’s really committed to an idea. Very few people would argue against the team building the idea being the most important component. How does this wiki funding experience hold that team accountable? People that have only invested $2500 have little stake in helping the idea be successful. It’s almost like buying a lottery ticket. You hope it hits, but at the end of the day you expect to lose it.
I could talk a lot more about this, but I’m glad that it’s being discussed here. I still believe that crowds of people can do amazing things. I haven’t seen Prosper.com in a while, but the concept seemed really powerful in doing loans. I’m also glad you through out regulatory problems. That’s probably the biggest problem with really trying to implement something like this.
John,
Thanks for your thoughts. I was actually thinking that each individual would be in charge of their own investment. That is, they’d be more like small angels (instead of a fund).
For example, I have $1,000. I then watch a company that is selling shares in their company for $1,000. I can buy those shares for myself. The reason it’s people powered venture capital is because people control their own destiny (and they don’t have to be a high net worth individual). They gain wisdom from the wiki (or comments) from others on the startup before they reach their decision.
So I think I may have confused things. It’s really not one big fund; rather, you control your own fund and invest your own money.
What do you think about that idea?
Thanks again for your feedback. I find it valuable and really appreciate it.
- Scott
Great post; couldn’t have said it better myself. I’m also convinced the status quo VC model is broken and what we’re experiencing for the second time in a decade is a humbling of a grouping of people that have become a little too big for their britches (note: I’m on the VC side, so I’m talking about many of my colleagues here).
The Wiki Fund idea is such a good one for two reasons: first, it is KISS (keep it simple, stupid). You can be a better quant than Nassim Taleb, but I think we’ve learned the more complicated we try to make things, sometimes the worst things will get. Second, this hits to the core of entrepreneurial and value investing. If you think about it, Joe the Plumber shouldn’t worry about his assets being screwed over because some bloke at 85 Broad was shopping for a new pair of Farragamo loafers when he should have been managing his client’s assets better. Is VC for everyone? Of course not, but I think the “old boys club” will continue to break up more and more.
The Wiki Fund idea reminds me a lot of some microfinancing programmes such as Kiva.org. You can sign up to provide loans to people in Least Developed Countries, so they can start a food stand or open a bicycle taxi business. Such a concept for start-ups might work. There are indeed regulatory factors to get past, but it isn’t true that this type of model is completely impossible. Also, Fred makes a good point about the fact that real venture investing comes after the deal is made. Indeed, this is part of the reason why the model is broken, because VC’s disappear after a deal is done all too often. Again, this is not something you couldn’t build into the model, though. In fact, this could be a major component of such a model, i.e., pool together more capital *and* expertise.
Very good concept.
I have spent myself a lot of time working on a similar concept, and it is formalizing into something called Entrepreneur Commons – http://www.entrepreneurcommons.org
I have talked to many people about it, including entrepreneurs, VCs, LPs, bankers, lawyers etc… and so far it is holding ground from a pratical and legal prospective.
If you are really interested in a social network of entrepreneurs investing in entrepreneurs, then maybe you will like what I have done so far. I would love to get the discussion going with you as well…
http://www.40billion.com – is trying to do what you suggest in our post, but I don’t see how they will get around the legal issues.
While I like the idea/concept very much, I would probably not even consider investing without some serious and verifiable data on the project. That data would have to come from a third party and be public as well. There are too many chances for scams in the model of a wiki funding.
Well, maybe I would throw in change now and then for things I like from people I respect. So, a few thousand $50 investments, buy a share for $50 maybe. That I would participate in.
Sadly can’t be done in the UK…the FSA (similar to SEC) would be all over it in flash. You simply can’t sell shares to individuals unles they are self-certified sophisticated investors or certified high nett worth individuals. In saying that of course you physcially can, but if things go wrong they can sue you for the capital plus interest.
There’s a company in Germany working around this http://couchtycoon.net/ so maybe an adjustment in semantics might be the answer?
Another thought I had for startups was to create facilitator accounts. Let’s say you’ve built a web subscription product and know with a bit of PR you can get a few thousand paying customers. For the sake of argument let’s call the normal subscriber account $30 a year. Now if you bundle 1,000 of these people into a facilitator parcel and let a facilitator account holder ‘buy’ them at $10 each, ‘own’ them, and charge them say $0.20c each per month facilitation fees, then that’s an auto-earn return for the facilitator of 24% per annum, and quite a low money cost for the startup.
Also, there is likely to be a legal way of facilitators having an option to convert to shares at some point in the future, and the value of the asset stays in existence as long as the $30 per year accounts maintain their value.
I’ve been told not to do it by the Angels and VCs I’m in discussions with at present (as it smacks of ‘securitization), but I’ll keep that up my sleeve if I don’t make funding progress in the normal way.
Everything else aside, as a startup, I do know for a fact that there are at least 100 early stage users (off the top of my head) of YouBundle that would each invest $1,000 because they believe in the product. They would just need to be given the right platform, ways and means to invest.
Hmm…
This is exactly what my company is doing – gTrade Global Trading Platform. We are launching a stock exchange for startup web companies for this very reason.
I totally agree with the current pitfalls you have outlined, and they need to change to match the whole web 2.0 mantra – for the people by the people.
Scot,
Great Post , I want involve in this toght process?
Have you given thought on Start Ups from Other countries while writing Blog?
If not, can you please think on it.
I agree with Mark – Kiva is a good model for wiki investing. To get past the post investment management problem Fred identified I think you would have to have some kind of management fee and employ a small staff like Kiva does. On Kiva every time you make a loan they invite a 5% donation to kiva to keep it running and you could do the same for wiki investing.
Amazing article. Thank you for sharing your toughts.
I think its an amazing concept. Especially when you start throwing in the viral effect created from the (potentially) hundreds or thousands of small investors.
When i originally started planning out my start-up, Urban Revurb, i though about possibly offering shares in a format similar to this. The challenge, however, is figuring out a way to eliminate the potential onslaught of information queries from the many “joe plumbers” wondering how his/her hard earned $2500.00 is being used. A thought that immediately reminds me of Boiler Rooms ” Don’t Pitch the Bitch” scenario.
One of the upsides to larger minority investments is the fact that you get bigger dollars from less people. This concept (assuming i understand it fully) switches that role. As such, it could be time consuming for entrepreneurs who would now truly have a “publicly held” organization. And, I would question if most of today’s entrepreneurs could handle that responsibility.
All that said, I would love to see this idea expanded on further. I think if perfected, it would benefit both sides of the fence tremendously. Not to mention, cut through a lot of the BS that surrounds public investing and an entrepreneurs fund raising efforts.
I wonder if you could get around the SEC problem by, instead of giving equity to each investor, instead just tie their payback to the amount the company makes, and cap it at some amount. Then it would be more like a loan with potential upside. Of course, then the “investor” wouldn’t have an ownership stake. You might be able to add some provision saying they have the right to buy stock in the future, but then it’s possible you could be right back into the securities problem.
Interesting idea, although participating in crowdsourced investments is probably not for everyone. There’s a reason for those security laws in the first place, since it’s easy for the average person to be easily convinced into putting in their life-savings into slightly more than hairbrained investment schemes promising great returns (look what happened in the 1920s before those laws were put into place).
Great article, but how do you get around reg D? That’s ultimately the real question; crowd-sourcing the deal sourcing process makes sense.
Scott,
I like the idea for all the funding and screening phases of venture capital, but I think it doesn’t work on the most important phase, which is what we could call the monitoring part, after the investment is made.
I have 3 VC’s as shareholders in my company and the most value I have gotten from them has been delivered because they personally have a responsibility to make things happen together with me.
They have been through the process before in a lot of other companies and all this experience is being shared with me because they have this personal involvement.
On the other hand, I feel a stronger push to deliver because I have the opportunity to be backed by these seasoned professionals.
I feel this would be lost without specialized professionals running VC as a business.
Hi All,
I took time out to think through this type of idea starting from the most ideal scenario a couple of years ago. I also debated the issues with a friend who sought to attempt to launch such a thing. The complexities inevitably compromised the model to something more closely resembling the venture capital model of today.
The attempt to do so became Creative Ventures Group (www.creativeventuresgroup.com). More active angel syndicator or pledged fund, it has not become as “democratic” or “wiki’fied” as what is aspired; but a model that has nevertheless been positive for our venture companies.
In short, Creative Ventures Group syndicates individual investors’ capital to invest into media/tech ventures; and I have done so, although it has become predominantly a very short list of individuals who have invested. We provide the active management of the investment and oversight of the companies.
The vision has also been to have a set of individuals who provide “corporate” functions across a number of companies, hence providing economies of scale of their services, synergies and cost-efficiencies and focus. This would work better with a number of smaller companies especially which cannot afford a quality CFO or whatever. Some people called it the incubator concept – but I feel it quite difficult to the idealist vision of having people sitting around coming up with ideas; and the word has many negative connotations from the 2000 dot-com bubble.
I have legally circumvented the FSA issues here in the UK (equivalent to the US SEC issues) through a co-investment model (i began as a corporate lawyer many moons ago), but the complexity of the legal documentation has not even passed even some more sophisticated high-net-worth individuals ex-bankers/derivatives traders, let alone a wiki-fied Joe the Plumber.
The list of learnings and challenges are long, but some include:
1) it takes more than a business plan to select a successful business – it requires in-depth understanding of the motivations of individuals in management etc: therefore, you currently still need an active ‘manager’ of individuals’ capital (and I am a strong believer in major transformations coming forth in our world – Ray Kurzweil-like);
the inevitable scenario of follow-up funding brings up issues of pre-emption rights and valuation that inevitably make it better to have a captive pool of investors for later tranches of capital;
2) it can take a lot of work to get small amounts of capital – it’s easier to get 250,000 off one individual than 250 x 1,000;
3) the communication of information issue to investors/shareholders is not to be underestimated – how would this be managed to a thousand investors (my CEO’s much prefer dealing with just me than, in one instance, previously 50 other shareholders); and furthermore
4) how do you control inevitably commercially sensitive/confidential material that needs to be communicated to shareholders/investors;
5) the passive model of investing – ie. investing without a board seat protecting your investor/shareholder interests – is really not a winning one;
6) the importance of management capabilities and post-investment assistance in these types of ventures cannot be under-estimated;
7) i don’t think that the complexity of these types of businesses yet warrants any Joe to invest as they could in micro-finance schemes;
9) the principles of law that are involved in corporate law, shareholders agreements and articles of association are in order to engender fairness and justice between the parties are inevitably quite complicated they require significant representation of any wiki investors.
To sum up, there are many significant quantum leaps that need to take place in our economic, legal systems that facilitate business as well as the ability to work and succeed virtually – before democratisation can take place to such an extent.
The model that remains is that we return to a “public market”, and then why wouldn’t this work for a publicly-listed company. The main reason for that is the complexity of the businesses, the sensitivity of information and the high costs in administering it. Therefore, at this stage, I come full circle to the conclusion that, in order to facilitate (a) availability of investment to many individuals of the public, and (b) to engender greater liquidity of ‘private equity’ investments, we inevitably come to the conclusion of “listed venture capital” funds. But therein are the same problems that I feel have led to our current economic demise.
One of the key underlying issues that few grasp is that we face a consistently rising level of complexity. Listed companies and their markets have worked fine while it’s been Ford producing more or less cars. But, the products and services that all of the niche business opportunities that are out there can serve, are more and more technically or otherwise complex. In my former big-corporate life, I found full-time buy-side analysts/investors from first-tier investment funds terribly lacking of material information for them to make the best decisions on investing in the listed-stock. How are they to deal with only having information in public markets as our industries become more complex in tech, biotech etc.
Therefore, I once again come back to the fact that those investing in a public market listed venture capital fund must have very specialised knowledge of the sector and have a close relationship with the managers; they are, once again, betting on the people who are running the investment. So, we come back to the fact that the best model of investing requires individuals having private information about the businesses they’ve invested.
Therefore, I revert again to saying that the venture capital model (listed or not) solves these problems, except that industry evolution points to a number of necessities:
1) we should keep focus on deals in the smaller equity gap (sub a few million) (there is a natural attrition dynamic – successful funds raise bigger funds and therefore focus on bigger deals, and therefore smaller funds are smaller); however
2) smaller deals require more ‘economies of scale’ through the corporate HQ that I mention whereby VC’s increasingly aggregate support to their ventures into the venture capital investor – ie. you have a corporate General Counsel that works across a few; same with tax advice etc; but
3) the 2+20 model for funds needs re-examination: funds have become anchored in that model, as an accepted norm. 2% management fees should be deducted from the ‘performance fees’. Now the performance fee number represents the ‘apportionment’ of merit in the process of procuring returns that should be ascribed the ‘investment manager’. First, (a) as investment returns are more ‘intellectually’ driven – ie. talent is increasing important; and (b) as more talent is aggregated across a number of ventures into the venture capital ‘manager’ – then the performance fee needs to be re-considered – most likely upwards. This is also because, if we focus on smaller deals, then we inevitably need more than a few people managing a several hundred million fund. These people need to be incentivised, and hence with more performance fee. There are those whose merit is rewarded in one company and those whose merit is rewarded across many. The alignment of incentives and need to avoid conflicts also means that individuals need to be either rewarded by the investors or through the company. Long story…, but I’m sure you get it.
4) we need to become more and more focussed on our sub-sectors of expertise…
That is my summary on the challenges to these ideals, and the realities. The VC model needs to migrate in the ways that I suggest, and idealism helps us to push it further away, but I don’t think that we are yet at the point where we can move to a total wiki fund model.
So sorry all for the long post, but this came out as a stream of consciousness!
Kind regards,
The Wiki Fund may face certain registration requirements under the Investment Company Act of 1940 that hedge funds and venture funds try to structure around. Those exemptions are for funds with 100 or fewer investors and funds where the investors are “qualified purchasers.” A qualified purchaser is an individual with over US$5,000,000 in investment assets. In addition, there are some requirements under the Investment Advisors Act that may be triggered. These issues, plus general securities law issues on making a public offering of securities that requires registration with the SEC, are likely fatal to the concept.
I understand that regulation poses a violent barrier for this model. That’s not something I spend my time focusing on. In life I’ve found that laws are problems, not solutions
Rather, I think the following questions must be addressed:
1) Would a bootstrapped company find a $2,500 investment valuable?
2) Would a bootstrapped company value operational freedom over a hands-on investor?
3) Are there individuals in this world, with less than $1m net worth, and have the capability to make educated investments in start-ups?
4) Are there angel investors that have made or are currently making colossal returns in the by investing in start-ups?
5) For entrepreneurs, is raising capital a difficult process?
I can safely say that the current questions remain unanswered with current laws in place.
Here’s my response to each:
1) Would a bootstrapped company find a $2,500 – $20,000 investment valuable?
Yes. Period.
2) Would a bootstrapped company value operational freedom over a hands-on investor?
Highly situational. For me, yes.
3) Are there individuals in this world, with less than $1m net worth, and have the capability to make educated investments in start-ups?
Yes. I am certain of it.
4) Are there angel investors that have made or are currently making colossal returns in the by investing in start-ups?
Yes. I know many personally.
5) For entrepreneurs, is raising capital a difficult process?
Yes. For reference, see thefunded.com
Does the wiki model solve this? I believe so.
This is a fascinating idea, and it’s exciting to see that it is already being tried in various forms.
I have two brief thoughts:
First, I think that such a venture would have to be headquartered in the Cayman Islands or wherever the current haven is for financial schemes that circumvent “normal” financial laws. Unfortunately, this would make it look like a scam, which will be a significant barrier to attracting investors.
Second, and most importantly, there will have to be some mechanism for enforcing transparency. I would argue that the root cause of the financial travail in which we find ourselves today (as well as in the 1920s, etc.) are the direct result of a lack of transparency – investors not being able to determine exactly what’s happening inside of “their” companies and then panicking when they find out that some of those things are bad. Certainly that’s the problem at the root of the mortgage industry, which tipped off the current malaise – many of the mortgages made in the last ten years have no hope of repayment, but we still can’t tell which ones.
What this idea speaks to is an idealized notion of free enterprise, in which people can put forth ideas and get others to put their savings behind those ideas in hope of getting significant reward. It’s arguably the most powerful notion in unleashing the creative power of human potential ever. But it depends on both parties having “perfect” information about the investment, and any impediment to that “perfection” is, essentially, “friction” that must be overcome.
This friction comes in the form of oversight (of both parties – ensuring entrepreneurs do what they say and ensuring investors don’t try to overreach their rights of ownership), and that oversight is the most costly and difficult part of this idea. I, as an individual, would be happy to invest in a set of companies, but I want to know, with some sort of assurance, what is being done with my money (even if it’s $100) in those companies and I want to go after anyone who attempts to defraud me. Similarly, as an entrepreneur, I want to attract investors (how many of your satisfied customers would invest a few hundred dollars in your company if they had the chance?), but I want to be shielded from the small minority who will harass me or demand liquidity for their investments that I cannot provide.
Over time a set of “social norms” would emerge that would be encapsulated as “best practices” – entrepreneurs who don’t provide timely and accurate information about their ventures would be drummed out, as would investors who put in $100 and then demand to run the company – but that’s only if the community survived the scammers and ne’er-do-wells who would inevitably try to game the system from its inception.
I’m really captivated by the concept, but I’m skeptical about the oversight part. It’s going to be tough to attract even small investment quantities if the investor doesn’t have some sense of reassurance that he’s not investing in a scam, and it’s going to be impossible to attract good entrepreneurs if they don’t know there’s “honest” venture money there. Someone has to do the “due diligence” – who will it be?
Scott,
I would add this question to your 12/8 list of questions:
Are there enough individuals/angels in this world, with MORE than $1m net worth, that have the capability to make educated investments in start-ups in the $1,000 to $5,000 range and would they be interested in doing so based on the passive wiki investment model?
If you can show that passive investment wiki model as detailed in your original post actually works for “qualified” investors, the success may provide the opportunity to change Rule 501 of Regulation D to allow smaller investors to play.
I would think that the wiki investment model would have to be built with two stages involved. The first would be the initial screening stage. People would review the pitch, check out the idea, team etc. even provide feedback for improvement, and once it received enough “yes” votes the company pitch would be moved into the investment section where people could actually pull the trigger. Let the community screen the crap ideas from the good and great ones would make the process more complicated but would provide some protection for newbies.
Just a few thoughts, great post and discussion.
Let me try to take this idea further, based on Fred Wilson’s feedback: what would prevent a real VC firm from using the concept of a Wiki Fund to screen potential deals? The average Joe would be allowed to invest small amounts of money, which would help interesting projects pop up. The VC would have the option of matching those “people investments”.
Some sites like TheFunded, Vator.tv and CambrianHouse already have some of those concepts in place. It doesn’t quite work yet, in my opinion. One concern I have is letting average Joe invest any money at all: without some kind of protection, scam artists will jump on the opportunity to defraud the masses. If you think spam is bad, this would take it to another level (with one spam e-mail, I could convince you to invest $5,000 in MySpamWorld, instead of buy $20 of stuff).
So SEC regulations are useful. That’s one of the reasons why at FairSoftware.net you can only get “virtual” shares of those startups if you perform work, not if you bring cash. It gets rid of many problems.
I do agree, in that, a vetting system must be in place (i.e. making sure the company is real, etc.) That can be done.
At the end of the day, I think that the only way to get this platform implemented is if it’s regulated by the government (i.e. it’s against the law to use funds for any reason other than proposed)
Scott et al, see my post mentioning the Wiki Fund at Mark to Market … “Joe the Plumber and Venture Capital” http://adjix.com/jrf
I’m excited. I have been thinking this problem of old VC model for several years from my start-up advisor role.
From the beginning of 2008, I started thinking solutions for this, in more serious level. On July I got an idea for an overall solution and started working on the business model for Venture Capital 2.0. At that time I had not heard or read about wiki fund or Entrepreneur Commons. These posts I have discovered after, we started to work on this in more serious way.
While working on building our founders team for Grow VC and doing some other stealth mode activities and viral marketing, I have found these articles and to me these all just proves the great potential of our model version, that still remains as it’s been since July (for the main concept and solutions).
We now have a great team of founders committed to setup our version of Venture Capital 2.0 service and are excited about all of this – I can’t wait to get 2009 going. Lucky for me it’s only few hours to new year
I feel this model will get sorted one way or the other, the path seems “so clear”. Will it be us or someone else that will eventually succeed, remains to be seen….
Valto, great to hear about your current undertaking.
It’s going to be an exciting and interesting journey. I’m looking forward to this model taking place. Best of luck in 2009!
Sounds a bit like meVC 2.0. At the height of the last bubble the guys at DFJ set up a closed-end mutual fund, listed the shares and then invested in private equity. At that time they didn’t have any crowd-sourcing capabilities so they just set up an advisory subsidiary of DFJ and they did the investment selection and management. I don’t know what happened to them, but they’re not around anymore and I’m pretty sure it didn’t end well.
Anyway, as many mentioned already, you’d have to get around the ’40 Act among other requirements and these guys pioneered one way. If you used that and added a web 2.0 wisdom of the crowd bit (something like TheFunded then you just might have something.
FN – Yep, I think DFJ was a bit ahead of their time.
Just like that, fools in the internet software space think they own the world of venture investing. Look guys, the real model that entrepreneurs are going to switch to is one of
three ways: grants, starting with a contract/another business and fund with products, or
using corporate money for larger investments. A much-needed shakeout is going on in VC land, across all funds, and everybody thinks they will be the ones to survive. What they do not realize is that nobody needs them anymore. Crowds are inherently foolish, and it is individuals who drive everything anyway, so this idea that small amounts of money will add up only works when it is given away freely, as fundraising shows every day.
This concept is being tackled by a few organizations that I know of. You can break the legal barrier you speak of… I am involved in an organization that is doing it… contact me
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