My previous post about the future of VC caught a few eyes, one of which was Jeff Nolan of Venture Chronicles. Jeff and I have been trading comments back and forth on my original post and I’ve not only learned a few new things, but feel that maybe I should flesh out my VC idea a little in an effort to eliminate some confusion and deliniate the boundaries of the idea. I feel that it is important to mention here that I have no experience in the VC field and I am fairly unfamiliar with investment law. I do think that this is a viable model and with the proper guidance from lawyers, could work. So here are some basic parts:
- The site would not be subject to investment law or the investment law side of it would be worked out. The reasoning behind this is that if operated along the lines of the Ebay model, it would actually only be facilitating the transaction, not participating in it.
- There would have to be some sort of regulation as to how the money is transfered. We don’t want to see people sending someone $1000 for a startup that never reaches full funding and not getting their money back. My thoughts on this is to have some sort of escrow account for the money that wouldn’t be accessed until the full funding amount was reached.
- There would have to be a lot of transparency. As an investor, I’m not gonna just invest in something without seeing some of the financials. Perhaps a non-disclosure in the membership aggreement for the site? Or perhaps just a non-disclosure at the financial level on a per startup basis?
I envision this becoming something that VC firms as well as private individuals would visit when looking for a more non-traditional way to invest their money. I think it goes without saying that the risk would be a lot higher than your average CD or money market account, but the potential returns could make up for that.
I also envision this being not solely for the big startups. I think it would be amazing to be able to search for the company that is looking for $100,000 to start up a mom and pop store somewhere right alongside the company that is looking for $5,000,000 to start the next Amazon. Too many of the smaller startups are left to fend for themselves with the SBA and financial institutions because most VC’s won’t touch something that small because the profits are relative to the investment. An investment of $100,000 may return 20% but an investment of $5,000,000 that returns 3% or less still ends up with more dollars flowing back to the VC. Most private investors like myself would be extremely happy to earn 20% on our money and don’t have the funds to throw $5,000,000 around.
Anybody out there with experience with the legal side of this that would like to leave comments? I’m interested to see if I am really just blowing smoke or if this could have legs.