The Securities and Exchange Commission (SEC) recently approved rules that enable new ways for startups to raise money through a process known as “general solicitation”. This has the potential to change the process of funding, which has been concentrated around small groups of entrenched investors and often followed old-fashioned protocols of in-person meetings. The shortcomings and often aggressive dynamics (“shark-tank”) of such funding processes have led to a veritable service industry of preparation for pitches and how to convince investors in a kind of speed dating process where most potential investors decide within the first ten minutes whether they like a business idea or not.
Rather than follow those traditional avenues of funding, general solicitation allows to address a much broader audience of potential investors. This has given rise to mediators such as SecondMarket which effectively bring a market mechanism to non-publicly traded companies. There are still restrictions as to who can invest in private companies – federal law generally allows people to invest in non-public companies only if they have assets of $1 million or annual income of $200,000. For now startup investments largely rest with angel investors. But it doesn’t take a big leap to combine the general solicitation ruling with new crowdfunding technology (for example Kickstarter or IndieGoGo) to imagine a future with much broader access to smaller-scale investment in private companies.
Of course there will be issues around how to protect the consumer and how to restrict fraudulent exploits. Despite these risks, many believe this SEC ruling to have paved the way for a thriving marketplace. In a Wired article about “the emerging VC machine“, author Ryan Tate concludes somewhat optimistically:
But the promise of slowly unwinding the old boys’ club of startup venture capital, of coming up with a more open, dispersed, and diverse funding network for entrepreneurs, is mammoth enough to overshadow those risks. Via the JOBS Act and this week’s SEC ruling, the government has set in motion the ad hoc construction of a vast venture capital machine. It will be a scary beast, but one quite likely fairer and faster than the flesh and bones system that preceded it.
Who will be the nimble players who will grab the scary beast by the horns and run with it?Read More