The current version of JOBS Act will allow unaccredited investors to invest upwards of $2,000 per year via crowdfunding portals in startups and small business. Traditionally, only family/friends of the founders, angel investors, and venture capital firms could invest in startup companies. Angel investors are typically wealthy individuals who will invest anywhere from $25,000 up to $500,000. Venture capital firms are financial organizations that will invest $1 million and up in startup companies at varying stages of development.
Although there have been revisions and improvements since 1933, ultimately these rules have been the norm. The JOBS Act will change all of this. The rules of the game are about to undergo a dramatic shift. Will this upset the established order?
On the Reporters’ Roundtable, a CNET podcast, Rafe Needleman discussed the JOBS Act and how it will affect entrepreneurs and investors. In particular, he interviewed George Zachary, a partner at Charles Rivers, a well-known and esteemed Venture Capital firm. When asked whether or not crowdfunding creates competition for investors like himself, he said, “It sure does, it’s another form of competition.”
However, Zachary went on to say, “I don’t think it’s really going to supplant angel and seed investing…I think it’s going to be an additional pool of capital to fill out rounds…I actually think it’s going to be more complementary than competitive.”
Zachary explained that it is a considerable burden for entrepreneurs to frequently attend meetings with potential investors in order to secure startup capital. Most entrepreneurs are seeking to raise as much capital in as few meetings as possible so that they can concentrate their efforts on building and marketing their product. As a result, they tend to favor a large volume of capital from a small number of investors.
The typical Kickstarter project owner will spend upwards of one and a half months preparing for a fundraising campaign and, once the project is live, spend the majority of each day gathering pledges and marketing the project. There is no doubt that raising funds for an emerging startup is a time consuming and exhausting activity. The question is whether it will be more efficient for entrepreneurs to raise funds by fielding meetings with established angel investors through personal contacts, networking events, and websites like AngelList, or through these new crowdfunding portals. Come 2013, we will find out the answer to this question.
