Every health ecosystem needs top predators. Predators at the top of the food chain help maintain a healthy balance between species and environmental systems. We become keenly aware of this in the ocean when sharks are removed it causes an increase in red tides, toxic algae blooms and a general imbalance to the ecosystem. This effect is called "cascade" or marine trophic cascade when talking about the oceans specifically. However, the cascade can take affect in any environment. The thing about the ocean is that since we, meaning Humans, can't see the cascade directly its the classic "out of sight, out of mind" tragedy of the commons. To help make this more relatable to us land based a simpler example we can all probably relate to:
- There are more deer in the USA today than in 1800.
- Meanwhile, deer predators (bears, wolves, mountain lions etc...) populations have been reduced to critically low numbers.
- The lack of predators keeping the deer population in check has increased the food supply of ticks, which has lead to an exponential increase in the number of tick borne illnesses such as Lyme Disease, anaplasmosis, and babesiosis. Deer alone aren't to blame for the increase in tick population. The decimation of song birds and other predators (they eat ticks) and Global warming plays a part in the increase in tick population as well. Global warming plays a part mainly due to having longer periods of warm weather that, in combination with more food (deer), allow tick populations to grow, spread and come into contact with more Humans.
Now of course you're wondering, "What do the number of ticks have to do with VCs?" Everything.
JOBS Act crowdfunding has created healthier "prey" species for VCs.
Before Regulation Crowdfunding there were limited fundraising standards for startups. Every startup did its own thing, resulting in a wild west of truly venture capital. Accelerators and incubators chimed in to varying degrees of success. It was a wild ride for everyone involved. For that reason and others (mainly sexism and institutional racism) VCs stuck to investing in people and businesses they felt comfortable with. Which is polite parlance for businesses that came to them from existing good ole boy networks. Even today women receive less than 3% of VC funding. Not because women ran businesses are less profitable or women less capable of running businesses. Nope. Women receive less funding due to good ole fashion sexism and in the case of Women of Color, institutional racism combined with sexism. But before we bore you to death with those stats and facts lets get back to the wild west of capital formation and the positive effect that Crowdfunding has had, not only on women and Women of Color but for VCs too.
JOBS Act crowdfunding has created healthier "prey" species for VCs. Sorry Founders, VCs are called Sharks for a reason and the so-called "Angels" are no less ravenous for equity than Sharks. How Regulation Crowdfunding has created healthier prey for Sharks is simple:
- Business basics - If you want funding Entrepreneurs have to have the basics covered. Meaning be a legit business, preferably a C-Corp, with proven traction in your industry either thru sales revenue, community membership or reputation.
- Financial Hygiene - Sharks, Angels, VCs, The Crowd, no one will invest in a business who doesn't have well documented financial processes, reports and practices. This means that you have books and your books can be easily audited to verify your cash flow and/or help accurately determine your business' value.
- Traditions, Culture and Habits - The Human side of business can never be underestimated. Since 2016 there has been an increase in the number of entrepreneurs (and VCs) who are turning to Investment Crowdfunding not as an alternative to VCs funding but as their first choice, instead of VC funding. VCs should rejoice. RegCF is perfect to help organize a startup's Friends & Family Round which is typically between $50k and $250k. VCs want healthy, robust, high growth potential businesses. Not lifestyle business or Founders who are too early in their journey to be worthy of VC predation. To put in different terms, no Shark wants to expend the energy to eat a baby seal with no revenue, team or traction, when for the same energy it could have a nice, fat 3-5 year old, cash flow positive startup.
- Standardization of Fundraising Materials & Process - The biggest favor that RegCF has done for VCs is standardize the process of raising funds. We've gone from the wild wild west of venture capital to a simple, stress relieving questions, "How much did you raise in your crowdfunding campaign?". With that simple question VCs know:
- The business is organized per SEC/FINRA guidelines
- The business has between 100 - 7000 "Investomers"
- Investomers are also customers who will help reduce the business' customer acquisition cost and marketing cost
- VCs have to compete for the best deals. The aforementioned facts, taken together and independently, have created healthy, more profitable (albeit competitive) investment opportunities for VCs. When the shoe is on the other foot, how does survival of the fittest feel, Sharks?
Ultimately, a healthy crowdfunding ecosystem, much like its counter part in natural world, requires healthy top predators. In this regards as the Regulation Crowdfunding industry matures (RegCF turned 5 years old on May 16, 2021 and is now old enough to go to Kindergarten) it will produce even more prepared, business ready and sophisticated startups; who combine a proven track record of raising funds from Investomers and Accredited Investors with great products and the knowledge, skills and ability to take on the rigors of scaling to $B unicorns.
To this ecosystem of startups and Sharks we also must mention the "whales" in the capital formation oceans - Broker Dealers. Broker Dealers (BDs) have access to far more capital than VCs. Too, BDs are even now partnering and will continue to partner with Funding Portals in symbiotic relationships to help amicably grow Startups from RegCF Friends & Family Rounds, to RegA seed rounds, to RegD offerings (this is what the BDs are really there for) and eventually to IPOs.
In Conclusion - Happy Hunting!
The Investment Crowdfunding industry as a whole is off to a great start and the environmental factors that determine its success, from regulations, investor education and appetite continue to grow in a positive direction. The real question is, "How will VCs evolve to maintain their position at the top of the capital formation food chain?" I don't know. But we will soon all find out together.
About the Author
Samson Williams is a serial entrepreneur and accidental investor. When not starting business with his enemies (“Entrepreneurship is hard. I only recommend it to my enemies.”), Samson is an Adjunct Professor at Columbia University in NYC and University of New Hampshire School of Law where he teaches on blockchain, cryptocurrencies and the Space Economy. Samson is also President of the Crowdfunding Professional Association and investor into two investment crowdfunding platforms Brite.us - CrowdInvesting Done Brite and GoingPublic.com. For more information on Samson visit www.SamsonWilliams.com and follow him on social @HustleFundBaby.
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Great analysis! I do disagree with one thing, the majority of the CF crowd has not learned to examine the financials and valuations of offerings. After a year I've repeatedly seen very basic questions on listings that you don't even have to look at the Schedule C to get the answer. I was the lead investor of a successful recently completed campaign, I got questions you wouldn't believe. I've been saying this to anyone who will listen, there is going to be a consolidation of active CF investors when there is no quick payoff. We all know these are long term investments, but if you surveyed most portal participants I know you would find a significant portion who expects to receive money in the next two years. They also could not tell you why they decided the company's valuation is fair. It's going to be the World Series of Poker boom and bust. What it looks like on the other side is TBD. Hey, the WSOP is still thriving, just a little scaled down.
I like where your head is at. Care to do an interview / AMA on your experience as a lead investor for the CfPA?
Sure thing Samson. What dates/times are you looking at? You can email me at johnroberts@moxeynola com