The Future of Startup Finance
Investment crowdfunding + venture capital play nice
Meet Dave McClure — entrepreneur, self described geek, curse word enthusiast, venture capitalist, and founder of the business incubator 500 Startups. A man of many hats, Mr. McClure possesses the brazen dynamism one would expect of an individual bent on disrupting the oft misunderstood and murky world of venture capital (VC).
500 Startups represents a departure from many of the widely accepted best practices of the traditional VC world. For example, in a 500 Startups world, the drawn out due diligence process that’s standard in traditional VC is banished in favor of a shorter investment decision process (often helmed by relative newcomers to the VC investment world) driven by iterative and scientific principles of the Lean Startup movement. Rather than single-ish digit (large dollar) per year investment decisions, 500 Startups is making 100’s of smaller dollar investments per year (600+ since its inception in 2010). This high volume experimentation method produces the necessary quantity of results/ data points that allow for statistically significant analysis and the subsequent data influenced deductions that play a key role in deciding who to double down on (invest further), and who not to. Their thesis is that this innovative process will make VC investing more efficient and scientific. Much like the Oakland A’s, 500 Startups is making due with less by incorporating a Moneyball-like methodology that runs counter to most other VCs. Keep your ‘swing for the fences’ methodologies traditional VC world. 500 Startups is looking to win the day with singles, and doubles in rapid succession (ideally).
Sounds pretty innovative, right? That’s because it is. Luckily for a particular Georgia-based electronic guitar manufacturer with 2 successful crowdfunding campaigns under their belt (Bohemian Guitars), Dave’s vision for how the financing of startups will play out in the future isn’t at all hostile to the prospect of investment crowdfunding.
In fact, it’s quite the opposite. By putting his money where his mouth is, and accepting Bohemian into 500 Startups’ coveted accelerator program, a pretty amazing precedent has been set here in the US. Oh, but what about the haters that speak of downstream investors turning their noses’ up at crowdfunded companies with their accompanying investors fudging up their cap tables? (Expletive) that! (Warning: researching Mr. McClure long enough will alter your vocabulary). As you see in the provided graphic, a future where investment crowdfunding serves a role in the seeding of promising startups is a welcomed addition to the funding ecosystem.
There’s little doubt that this Boho x 500 Startups marriage establishes an important precedent that many will surely benefit from. It signals to others that crowd investing is not only valid, but in many circumstances it’s preferable. For Bohemian it means they’re now in line to benefit from the tutelage, mentoring, and exposure to quality entrepreneurs-in-residence that are associated with the accelerator. For their Georgia investors, it’s affirming as their shares stand to appreciate in value should Bohemian “blow up” thanks in part to lessons learned via the accelerator program. For businesses considering investment crowdfunding, it provides a shining example of what’s possible. Last but certainly not least, for 500 Startups itself, Bohemian Guitars brings with it the type of verifiable social proof that accompanies two successful rounds of crowdfunding via Kickstarter and SparkMarket. Here’s the upshot: each crowdfunding campaign essentially acts as an experiment that spits out invaluable data/ results that help take the guess work out of a subsequent investor’s decision making process. In due time, I have little doubt downstream investors will come around to Dave’s progressive opinion. But hey, don’t just take my word for it…
Across the Pond, UK investment crowdfunding platforms, Crowdcube and Seedrs, have made great use of their three year head start on the alternative finance path. Both have worked in concert with European VCs to the benefit of the companies on their respective platforms. Seedrs listed startup, Maily, serves as a fine example of how the relationship between crowdfunding and VCs can look here in the US in the future. As recently covered by Forbes, Maily’s financing may well serve as, “The Model for Startup Funding In Europe Today.” Whereas 500 Startups signed up Bohemian Guitars following their SparkMarket raise, Euro VC Faber ventures is investing in Maily alongside ‘The Crowd!’ Clearly this represents the next evolutionary step in the financing of startups. The only question I have is, just how long it’ll take for this progressive vision of the future of startup finance to wash ashore here in the States? Soon.
