Is crowdfundig a threat to VC firms?

With so much talk of crowdfunding in the air we probably need to start asking the question on whether crowdfunding will be asking over from VC firms in providing the much needed business finance for the 1000's of startups needing seed money and not finding it anywhere at the moment.

Recently, Fred Wilson, a famous VC at Union Square Ventures, proffered a rather pessimistic assessment of the future of his industry in the wake of the JOBS Act and the resulting move to equity crowdfunding. Wilson sees great potential for entrepreneurs using crowdfunding portals to raise capital. But for the problematic VC industry, the news isn’t so good. His thesis is that it’s better right now to be an entrepreneur than to be a VC. In his own words, “Venture capital is becoming a bad business.”

In his estimation, Wilson sees families investing one percent of their assets in crowdfunding, which translates to a $300 billion bonanza for entrepreneurs and start-up companies. This process could start by the end of this year, when the first equity crowdfunding portals will go live. We are all waiting for the Securities and Exchange Commission to finish making rules, which are due by year’s end. Wilson isn’t particularly sanguine about the returns on these investments, but he doesn’t discount the lottery mentality that will probably drive crowdfunding investing despite the risks.

Currently, VC firms receive about $30 billion a year in investments from large institutions and banks. This is only about four percent of the investors’ portfolios, which may reflect the fact that the VC market has underperformed the stock market in the past two decades. Apparently, about $15 billion of that annual investment goes up the chimney because of bad investments. In other words, the best VCs can do is put $15 billion to productive use each year. This begs the question – who will figure out how to intelligently employ $300 billion in crowdfunding investments?

A company can only raise $1 million per year via crowdfunding. For VCs and angel investors, this is chump change. Angel investors regularly invest much larger sums – in recent years, Russian, Middle Eastern and other angel investor have sweetened the VC pot $1 to $2 billion annually. How will $300 billion in crowdfunding “casino money” be allocated to so many small businesses without overwhelming the system? Wilson doesn’t have the answer, but he does have a recommendation to VCs – become entrepreneurs or, if you can believe it, bloggers! While crowdfund blogging is the most noble of professions (ahem), it’s more likely that VCs will simply adapt to the new environment. Wilson offers five options:VV 1. Make investments in obscure niches rather than following the crowd.
2. Cut by an order of magnitude the amount of money you raise.
3. Become angel investors.
4. Become leaders in the crowdfunding industry by making recommendations of companies they think are worth funding.
5. Retire.

Venture Capital vs Crowdfunding

With so much talk of crowdfunding in the air we probably need to start asking the question on whether crowdfunding will be asking over from VC firms in providing the much needed business finance for the 1000's of startups needing seed money and not finding it anywhere at the moment.

Recently, Fred Wilson, a famous VC at Union Square Ventures, proffered a rather pessimistic assessment of the future of his industry in the wake of the JOBS Act and the resulting move to equity crowdfunding. Wilson sees great potential for entrepreneurs using crowdfunding portals to raise capital. But for the problematic VC industry, the news isn’t so good. His thesis is that it’s better right now to be an entrepreneur than to be a VC. In his own words, “Venture capital is becoming a bad business.”

In his estimation, Wilson sees families investing one percent of their assets in crowdfunding, which translates to a $300 billion bonanza for entrepreneurs and start-up companies. This process could start by the end of this year, when the first equity crowdfunding portals will go live. We are all waiting for the Securities and Exchange Commission to finish making rules, which are due by year’s end. Wilson isn’t particularly sanguine about the returns on these investments, but he doesn’t discount the lottery mentality that will probably drive crowdfunding investing despite the risks.

Currently, VC firms receive about $30 billion a year in investments from large institutions and banks. This is only about four percent of the investors’ portfolios, which may reflect the fact that the VC market has underperformed the stock market in the past two decades. Apparently, about $15 billion of that annual investment goes up the chimney because of bad investments. In other words, the best VCs can do is put $15 billion to productive use each year. This begs the question – who will figure out how to intelligently employ $300 billion in crowdfunding investments?

A company can only raise $1 million per year via crowdfunding. For VCs and angel investors, this is chump change. Angel investors regularly invest much larger sums – in recent years, Russian, Middle Eastern and other angel investor have sweetened the VC pot $1 to $2 billion annually. How will $300 billion in crowdfunding “casino money” be allocated to so many small businesses without overwhelming the system? Wilson doesn’t have the answer, but he does have a recommendation to VCs – become entrepreneurs or, if you can believe it, bloggers! While crowdfund blogging is the most noble of professions (ahem), it’s more likely that VCs will simply adapt to the new environment. Wilson offers five options:VV 1. Make investments in obscure niches rather than following the crowd.
2. Cut by an order of magnitude the amount of money you raise.
3. Become angel investors.
4. Become leaders in the crowdfunding industry by making recommendations of companies they think are worth funding.
5. Retire.

South African Crowdfunding

Today South Africa is one of the largest emerging consumer markets, and requires working capital to operate, to grow and to compete successfully in sectors with future potential, such as agro-industries, solar energy, business finance, mobile phones, gold mining and advertising industries.

Unfortunately, there are very few accredited angel investors and venture capitalists who one could approach with your business plan. The continent’s banks rarely lend to early-stage entrepreneurs and small businesses. Most international investors hesitate to provide capital to African startups. Anglo-Saxon, Chinese and Arab investment funds focus only on mostly large corporate entities.

A new financial instrument, with very flexible rules, could strengthen small business growth in South Africa and could wind up changing the entrepreneurial landscape for the better. Initially developed in the United States, Crowdfunding allows users to submit projects that have potentially had difficulties receiving traditional funding (from banks, venture capitalists, angel investors…) by raising small amounts of money from a large number of ordinary individuals (Internet users, network of contacts, friends, and small-scale investors).

Its purpose varies, from artists seeking support from fans, to small businesses looking for funding, to technology, to political campaigns, to citizen journalism or organizations dedicated to disaster relief.

Crowdfunding platforms give entrepreneurs new tools to describe their investment opportunity and people to become investors in these opportunities for very little money. There is no legal obligation to hire lawyers or advisors to assist in the fundraising process.

The project initiators disseminate the information using their social networks and encourage many other people sharing the same interests in their networks to do the same.

In addition, crowdfunding is an excellent way for entrepreneurs to test and improve their products/services through these online platforms and it provides a forum of feedback from the internet community. If the projects do not reach its funding goal after time expires, it would mean that the products or services do not meet the public needs, requirements and expectations and some changes need to be made. Finally, one of the advantages of crowdfunding is that project supporters can raise money without giving away any equity in their business like they would have to do with venture capitalists.

Kickstarter, one of the pioneers of crowdfunding, has implemented a huge number of successful projects in the United States and has demonstrated convincingly the viability of the concept. Given that the sector exhibits huge growth potential, www.McKenson-Invest.com , an online platform connecting investors and entrepreneurs, is currently undergoing major changes in order to become a true crowdfunding platform for all kind of projects in South Africa. One of the Obama Administration’s initiatives, which have been the subject of profound debate in financial and economic circles in the United States, may be of interest to the business landscape in South Africa. In November the House of Representatives passed a bipartisan bill, the Entrepreneur Access to Capital Act, which would allow anyone to raise startup capital for their business, up to $10,000.00 via the Web (or up to 10% of one’s income, whichever is less) , with a cap for companies at $1 million and provides a Crowdfunding exemption from SEC registration. Donors will be considered as true early-stage investors because they will participate in the company’s capital as partners or shareholders. Under current U.S. law, the sale of equity in private companies is limited to “accredited investors”. The bill that was passed in November provides a Crowdfunding exemption from SEC registration.

The enormous potential remains largely untapped in South Africa, with only a fledgling sector in Europe, which is also predicted to have one of the brightest futures.

Crowdfunding platforms could help more early-stage entrepreneurs launch and develop their business idea in South Africa. The representatives of economic authorities should quickly implement a robust legal and regulatory framework in order to promote and encourage crowdfunding on the continent.

The Regional Stock Exchange, which handles transactions for eight States of West Africa (Benin, Burkina Faso, Guinea Bissau, Ivory Coast, Mali, Niger, Senegal and Togo), the Central African Stock Exchange (led jointly by Gabon, the Central African Republic, Chad, Congo-Brazzaville and Equatorial Guinea), the Douala Stock Exchange and the Rwanda Stock Exchange are also the way for businesses to get funding by issuing stocks and bonds. Unfortunately, these financial markets have a very small number of listed companies, have failed to persuade all the identified businesses to go public and are unable to draw the attention of the international investment community. The probable merger between the Central African Stock Exchange and the Douala Stock Exchange will not make things any better. Economic fabric is mainly made up of very small enterprises (VSEs) and small and medium-sized enterprises (SMEs) in the majority of French-speaking countries in sub-Saharan Africa. Many of these ventures are not eligible for listing.

The above-mentioned stock exchanges remain essential structures and should coexist with crowdfunding organizations. Its development will depends on a dense network of innovative, successful and highly dynamic SMEs, the improvement of bancarization level, an active campaign to educate business owners about the introduction to the stock exchange, the establishment of a stock market culture, a high savings rate of private households, the existence of online brokerage firms and an administrative and financial autonomy, free of political interference. There is still a very long way to go before they reach the same size as the major international financial centers.