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Hail Crowdfunding! The Wicked VC is Dead.

As seen on Forbes.

A little extreme?

Maybe. And sorry for offending any VCs out there.  But have you heard the news from across the pond?

Two entrepreneurs + one startup + 70k followers + 14 days = $933,342.00 in funding (600,000 British Pounds)

And not a venture capitalist in sight.

Call it “crowdfunding”.

Now please understand I am not knocking the VC racket.  (Oops, did I just call it a racket?)

Seriously though.  We need VCs too.  They fill a role in the world and are smart guys and gals to boot. But hey, even the infamous VC guru Fred Wilson spewed these words recently;

“Venture Capital is a bad business.”

Yikes.

So, wow — this crowdfunding thing really looks like a potential game-changer.

Case in point: 394 followers of the little startup in London called Escape the City now own 24% of it.

Yes; you read right:  Crowdfunding for an equity stake.

And this my dear entrepreneur friend is good news.  For you.  For me.  For all entrepreneurs out there.

Why?  Because starting in 2013 — it’s coming to the good ole U.S. of A.

Part of the JOBS Act I guess?

Now I don’t know too much about the whole program, but I do know this:  If crowdfunding for equity comes out of it; and it helps entrepreneurs who are truly interested in building stellar companies; then someone gets a high-five and a slap on the back from me.

But since I’m no expert on the subject, I reached out to a guy who is.  According to Nick Tommarello, Co-Founder of WeFunder, here is the deal:

“The CROWDFUND Act is part of the JOBS Act that President Obama signed into law in April. The Act legalizes investing in startups for everyone, not just the wealthy.  Now my Co-Founders and I knew this was coming — so we reached out to potential crowdinvestors in January to see what kind of commitments we could get from people interested in investing in startups.  Within three days we had somewhere around $5 million in pledges — which got a lot of attention in the right places. After those three days, we were in front of the Senate Small Business Committee, and then within the week after, our entire team went down to Washington D.C. to visit noted staff of a couple of senators, the House, and congressmen who led us through the House and the President’s office.”

“So for instance, there are small businesses which are really starving for capital. Then there’s high-growth startups, which, at the present time, there’s probably a surplus of capital for. So what excites us most about this new legislation is making it so your most passionate users, your evangelists, can get a feeling of ownership by investing in you.  And by getting an army of a thousand really passionate evangelists who want to help spread the word, want to give product feedback, want to share their connections — that to me is the real value to startups.  In my mind, this means more than if one professional investor decided to back you.”

“Another exciting piece of this is providing a more efficient mechanism to basically give capital to the doers. I can buy a stock of G.E. and that adds some value; but giving that same amount of money to a two or three-person startup company — it goes so much further and has so much more valuable impact to the world.  This will shake things up — because if you go raise a million dollars from crowds, those connections to the right people will just mysteriously appear because the premier professional investors smell success. When things start happening, they’ll always reach out to you — no matter who you are or where you come from.”

“And so I think at a higher level, we’re moving to a world where the money isn’t as important as the intangibles. A great VC has really awesome connections, and because these are the top tier VCs who can help you in other ways, you might want to take their money.  But the second tier VCs — there’s no reason anymore to have these guys if you can raise just as much money easily from the crowd.”

So wow — here we go.  And hey, thanks Nick for sharing your wisdom with me.

But hold on a minute; I’ve got to finish telling you the story of my chat with Rob Symington, CEO and Co-Founder of Escape the City.

5:00pm his time; 9:00am my time; we hook up on Skype.

First thing I ask him?  Were he and his Co-Founder partner Dominic Jackman absolutely stunned on raising the equivalent of nearly $1 million dollars in only 14 or so days?

The short answer?  Yes.

Rob put it like this:  “We were all blown away.  We knew we had a lot of goodwill for our idea out there and we know we have quite an engaged subscription base — but we never knew it could convert to cash.  I mean it’s truly incredible.”

Yes, you’re right Rob, truly incredible.

You see, Rob and Dominic were in the middle of doing road shows to VCs.  Trudging to each group; giving their pitch; hearing mostly “no”.

Yuck.  And so goes the VC route.  Gatekeepers to the moola.

Ah, but then someone recommended crowdfunding instead.  And no; we’re not talking about going the Kickstarter route.  Now I don’t know what’s up with Kickstarter and all their troubles, but I do know this:  It’s not the same thing.

With Kickstarter, if you throw some money at an idea; all you get is a fancy t-shirt and some other form of “depreciating” asset.  Basically, you get zero equity in the project or company you back.

And that my friends is not really investing in anything — other than some good feelings of helping someone.

So crowdfunding in Europe for equity is alive; and will be here in the States soon.

Rob and Dominic jumped at this idea and decided to give it a whirl.

So they slapped together a PDF of their pitch, sent it to their list of 70k, and basically said — “hey, this is what we’re planning.  Who’s with us?”

394 followers said “we are” with their pocketbooks.

Now as Rob pointed out to me; it worked for them because they already had the followers.  Think about it — a list of 70k strong; all believing in what they do.  That’s a pretty powerful asset to tap into.

But still the same, us bootstrapping entrepreneurs have a tough time of it sometimes.  Access to funding is one of the biggest obstacles to overcome.  And adding another potential source of funding to our plate is a glorious thing.

And who knows?  20 years from now?  Perhaps the VC as we know it will indeed be dead.  Or at the very least, a different iteration of its current self.

Goodness.  Gasping for air might be in store for a few.

As Rob shared with me; they actually turned down a VC who matched the offer of crowdfunding;

“I don’t think they’re used to hearing “no”. That’s for sure. It was a pretty intense meeting. There were two phases to the reaction. The first; before they thought we had made our decision, they tried to persuade us this was a bad idea. Then after we made our decision and made it clear we were going to crowd fund; they were very gracious and offered to still be involved and see where our company goes to potentially fund future rounds.”

So I don’t know — what do you think?  Should we “hail to crowdfunding” as another source of funds for entrepreneurs?  Does this spell the death of VCs as we know them today?  If Fred Wilson sees trouble brewing — should we sit up and pay attention?

One thing for sure — we aren’t in Kansas anymore.

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About the Author: Eric T. Wagner is a husband, father and life-long entrepreneur. After starting multiple businesses, Eric is now focused on helping other entrepreneurs find the path to success in business and life. You can also catch his gig on Forbes or connect with him on Google+.

Comments

  1. De'Andre says:

    This is a very innovative way of getting start-up funding. When this is introduced on a mass scale in the United States, people will jump on the idea. America is in an innovative state right now, well maybe the world in general. I support this idea of crowd funding. Because of this article, I will research and in the end promote this idea of start-up funding. It is innovative, creative, and cool. Anything with this combination is on the way up.

  2. Michael J. Stelmakh says:

    Hi, Eric!
    Fred Wilson mentioned that: “My concern is that the venture capital industry, as it’s organized today, can only put to work $15 billion intelligently. That doesn’t mean that more money can’t be put to work intelligently. It just means that we can’t figure out a way to do it.” The entrepreneurs don’t connect with the right VC’s. And that’s why crowdfunding wins. It has more efficiency.
    Thanks for sharing, Eric :)
    Michael

    • Eric T. Wagner says:

      Agreed Michael.

      Crowdfunding helps clear the clog in the funnel to get available funds into the hands of the entrepreneurs.

      Thanks for your input. Eric

  3. The moral of the story to me is this, when using crowd funding for a big project for that matter, try offer funders some positive stake in the finished product.

    If VCs dies, then another one will rise which will work for some people and then dies again and another and another comes up.

    I see crowdfunding going a long way to help start-ups.

    Sheyi

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