Start Up Blog

Borderless Venture Capital

Posted in entrepreneurship by Steve Sammartino on January 25, 2010

This is the third of my crowd sourced blog entry ideas as suggested by Aida_Lee. Aida wanted to get my thoughts on the following: In today’s cheap, quick and global market, what do you see as the blueprint for a border-less venture capital to work?

There is no doubt Venture Capital has been a bit of closed shop historically. And although we’ve seen some opening up of business funding in the USA with vehicles such as the techcrunch 50 and Paul Graham’s Y Combinator, other markets such as Australia are lagging behind quite significantly. My views are the opinion of someone who has raised venture and angel funding before for new ventures.

In my view a thing things need to happen for the traditional structure of Venture Capital to change:

  1. A startup community must evolve in a tight geographic region – this often facilitates events such as those mentioned above in Silicon Valley.
  2. Disruptive technology must become available which breaks down traditional access barriers to outsiders.

Number 1 has happened in only a few locations, namely S Valley, but number 2 has happened all over the world and this is where I see the major changes. The thing that new internet technology has done is brought entrepreneurial communities together. Now we can find each other without having to live near each other. But the funny thing about raising funds for what is considered risky investments, is that it isn’t nearly as much about the idea or revenue potential. It’s about the ability to the team raising to sell themselves. And all real selling requires lots of face time. It’s hard to do this on line, or across borders. So I think that large capital raising wont change a great deal in the future. But, I do see an important  capital raising revolution coming:

Crowd funding.

It’s been done already in a few markets, and some entrepreneurs and start ups have already used this technique to raise money for their venture. The idea has been well documented, but a true revolution, such as social networking  has yet to happen. The main thing holding it back has been government regulation from the likes of the SEC and ASIC in Australia. What I think the next iteration will be, is a web based business which takes micro payments / investments (a little bit like Kiva) from a large number of punters (for lack of a better word) to fund the new business. Method of which would be like an on-line float for startups. The investors who then would become digital evangelists for the new company. There would be a synchronized  ‘investment beta’

The key service of such a site would be to overcome the legal vagaries for all participants and be able to take investments in multiple currencies from multiple markets. There is no doubt this would leverage the quickly building on line entrepreneurial communities. It would also have an important impact the venture capital industry structure the same way digital freelancing websites like elance have respectively.

I’d be interested if there are any sites already doing pure crowd sourcing, and to hear what your thoughts are.

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4 Responses

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  1. Aida Lee said, on January 25, 2010 at 9:38 pm

    Hi Steve, you have raised brilliant points in your piece.

    Crowd-funding as an alternative mode of capital raising is a novel idea. I share the same concerns as you have about the present extent of legal regulation to cater for crowd-funding.

    Would it fall within the orthodox understanding of capital raising, would any of the activities associated with crowd-funding breach any provisions in the federal Corporations Act, compliance with legislation and regulatory bodies, how is it to be regulated, which government departments ought to oversee the rules and procedures.

    From my general understanding of this space, 1) there are a lot of start-ups, 2) yet there is a lack of incubators that offer entrepreneurs a variety of resources. To make an in-road for crowd-funding to take off, perhaps there needs to be incubators in the Australian space. My reasoning is, if the ground work is laid and the infrastructure is set up, they will come.

    Aida

  2. Mark said, on January 26, 2010 at 10:26 am

    Check out prosper.com, they were shut down for a while due to legality infringements and now are back online. I have not followed them much but read recently about them coming back online.

  3. pcaveney said, on January 26, 2010 at 12:37 pm

    Great post! Glad you mentioned Kiva because i was thinking about it while i was reading. i really like the idea of a crowd funding a new project. I think it would build an interesting relationship between the investor crowd and the entrepreneur.

    I do not know what the legal troubles would be but one problem i can see is that the investments would have to be larger than Kiva investments. If you are using kiva as an example. Because Western startups need significantly more money to start than third world start ups. So would investors invest maybe one to ten thousand dollars? Or would investments stay low with more people contributing? If investments are bigger would the investors see returns?

  4. Brent Shepherd said, on February 8, 2010 at 4:47 pm

    I’ve been interested in this type of marketplace for a while. I’ve waited to see the “crowd funding for startups” marketplace come along, but it never has!

    I think the most interesting question is whether it’s possible to make a crowd funding equity market. Crowd funding debt markets – money given in return for interest – are already operational, Zopa/Prosper/Kiva and iGrin/Lending Hub domestically. However, there is no market swapping money for equity. I imagine this is because it’s a legal nightmare. Just look at the regulation behind the ASX! Webequity.org is the closest I’ve seen, but it’s more “Brains for Equity”.

    I’d love to hear your thoughts on a crowd funding equity marketplace Steve. Do you think it’s legal roadblocks or just lack of demand? VC’s give a lot more than just money in return for equity.


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