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Venture Capital for the 99%

February 7, 2012, 11:21 PM
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The crowdfunding phenomenon, which has already helped thousands of artistic and cultural projects go public, is now crossing over into the world of venture capital and the financing of startup companies. The only problem is that, until now, it has been illegal to invest as little as $100 at a time into a new startup without first being an accredited investor. If you don't have $1 million in assets or $200,000 in annual income, you don't qualify and can't invest. Until now, venture capital has been a game only for the 1%. A new petition circulating on the Internet seeks to change all that by encouraging Congress to pass a law (Democratizing Access to Capital Act) that would make it possible for anyone to invest small amounts of money in a new venture, in the same way you might crowdfund an art project.

For now, the WeFunder crowdfunding petition has been a runaway success. Launched with a modest goal of attracting $100,000 in pledges and raising awareness about the democratization of capital, WeFunder has now attracted nearly 2,000 funders who have pledged a total commitment of nearly $5.5 million. The number, while impressive, is nowhere close to the billion-dollar VC funds raised in Silicon Valley. But it does point to a seismic mind shift in how we think about funding startups, as notions like "the wisdom of the crowd" become part of our daily lexicon. As WeFunder points out, people are already able to donate money to crowdfunding projects like Kiva and Kickstarter - why not enable them to invest as little as $100 in jobs-creating startups?

There is a reason, of course, why venture capital has been walled off from the 99%. The high threshold to become an accredited investor was meant to discourage “dumb money” from investing in speculative ventures and losing money. In venture capital, you don't always make money - most startups in your portfolio eventually go bellyup. By common consensus, 8 out of every 10 VC-funded companies are failures - the two that end up making it pay all your bills. Compare that to a Kickstarter project: you don’t lose your money and you don't have an economic stake in the outcome. Instead, you’re paid “in kind” – a new DVD from a film director, perhaps, for a film project. The idea is that you invest in the success of the project and what it stands for, not in financial gain.

Concerns about fraud and the Vegas-style aspect of investing in untested  startups, however, fail to acknowledge just how good crowdfunding sites like Kickstarter are at generating “winners.” The new legislation would require a certain amount of due diligence as well. According to Kickstarter, a majority of projects reach their funding goals. Not only that, the quality of projects is improving. Consider for a moment that indie filmmaking – one of the most popular areas of the site – is having a renaissance now, thanks to Kickstarter. At this year’s Sundance Film Festival, for example, fully 1 in 10 films (17 overall) were Kickstarter alumni. In other words, films backed by the crowd are the same films you'll be watching in theaters this year.

What has always made the American start-up scene so vibrant is the presence of deep-pocketed “angel investors” who supply the financing to keep startups afloat before they attempt to raise an initial round of venture capital financing. These angel investors, historically, have been rich dentists and even richer tech entrepreneurs. Signing the WeFunder crowdfunding petition will broaden these ranks even further to include not just rich dentists, but also freelance writers, aspiring filmmakers and hard-working homemakers. Entrepreneurship is so ingrained in the American psyche now that the Ewing Kauffman Foundation, one of the leading voices for American entrepreneurialism, even ran a 30-second spot in this year’s Super Bowl called “Will It Be You?” By supporting the crowdfunding of startups, you are making it possible for a new generation of entrepreneurs to answer that question with a "yes."

 

image: I Am the 99% / Michael Rubin / Shutterstock

 

Venture Capital for the 99%

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