

Series A Crunch: Why Startups Will Use Crowdfunding Instead - acremades
http://www.forbes.com/sites/tanyaprive/2013/01/22/series-a-crunch-why-startups-will-use-crowdfunding-instead/

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rexreed
Crowdfunding can potentially be a deal-breaker for startups trying to raise a
later stage of funding -- at least as it stands right now.

I've heard from many Series A / B VCs that they will not invest in startups
that have gone the equity-based crowdfunding route (that is, not the
Kickstarter approach, but the new kind where equity is provided as per the new
JOBS act), because they don't want to deal with hundreds of tiny investors.
It's a nightmare for them.

The only way to deal with these sorts of equity-based crowdfunding platforms
if you plan to go for a later stage equity investment from a VC or other
investment professional is to bundle all the unaccredited / crowdfunding
investors into a single LLC or other entity and have that entity invest in the
startup with terms that allow future investors to treat them all as a single
class in much the same way they deal with accredited angel investors now.

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jrkelly
FWIW, I think AngelList is already planning to do that bundling via
SecondMarket with their crowd-funding offering:
<https://angel.co/help/invest#invest-3>

Q: Do startups have to deal with a million new investors?

No. The overhead is the same as adding a single large investor to the round.

All of the investors are pooled into a single fund which, in turn, invests in
the startup. Only the fund is listed on the company's cap table—the individual
investors are not. The fund also signs the investment documents, the
individual investors do not.

~~~
rexreed
This is the right approach, I believe. However, it has not yet been tested in
the courts if an investor in the pool sues when he/she feel wronged when a
future investor tries to cram down all these investors in a down round. It's
inevitable to happen at some point, and it will probably be an issue given
that most investors in the crowdfunding approach will be unaccredited
investors.

Right now as it stands, Second Market is only available to accredited
investors (<https://angel.co/help/invest#secondmarket>) and so the JOBS act
crowdfunding rules don't apply here in the same way.

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shawnee_
_This opportunity only highlights the influence that the JOBS Act will wield.
It is my strong belief that the SEC needs to consider investment crowdfunding
for non-accredited investors as an urgent matter and finalize the JOBS Act
regulations immediately. The delays in these regulations will also delay the
creation of thousands of new jobs in the United States, not to mention the
fate of this growing pool of fundless startups._

A couple weeks ago, we saw an HNer proposition to give $8K for a 50/50 "co-
founder" seed funding-type split:
<http://news.ycombinator.com/item?id=5037694>

There is absolutely no reason, aside from the existing regulations / barriers
to entry, that this model shouldn't be applied to helping new enterprises get
seed funding. The $8K / 50:50 made a great initial throwdown offer. . . but in
a market setting, there should be competition; what if someone else more
generous could offered $10K without requiring half the equity? One necessary
element is a bidding platform, and a place for people with cash to transact
with people who have ideas. More potential investors equal higher potential
investments equal more opportunity for those "fundless startups" to get up and
running.

It would be awesome to work on something like this (ping me -- I'd love to get
back to work!): build an eBay clone, integrate Stripe to handle
escrow/payments and collect a ridiculously small fraction of the economic
surplus created. No need to be greedy (as per the current flaw of existing
systems); this model would make investing accessible to common folks and be
profitable enough as a going-concern.

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jusben1369
This was more infomercial than blog post. I have no issue with the author
looking to build awareness for her new offering but wonder why it's on here as
it doesn't add anything to the question around Angel to Series A or to
Crowdfunding.

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hkmurakami
Except crowdfunding can never provide the sales leads, partnership leads, and
M&A leads that VC firms can (or at least the best VC firms).

People call startups an insider's game for a reason. If you're not taking VC
money (or are unable to), then you really need to be prepared to forge your
own path, and not become "just another startup like all the others".

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scottbartell
I would say that in most cases early stage startups should not give away
equity but should stick with donation/preorder crowdfunding. I see
crowdfunding as a tool for startup that can be used to validate their MVP.

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tibbon
So what is the current (legal and practical) state of crowd funding? Let's say
I've got a startup that's just post-seed or post-angel stage- can you
realistically do this all today with the current laws and market?

