Thursday, July 19, 2012

The NLCFA Team : Creating the Curve

Being the Executive Director of the National Crowdfunding Association is a great privilege.  It is a very rewarding and enjoyable experience, though also highly time consuming, stressful at times and certainly challenging.   But I love it.  It is the PEOPLE who make it so amazing.  I just got off the phone with yet another new member of the NLCFA who is looking to get involved on a committee or initiative and help shape this industry.  That kind of conversation happens at least twice a day.

For so many of us it isn't about being ahead of the curve, it is about creating the curve.  In order to do that, we need a great team of people with hopefully different skill sets and knowledge, and all willing to do the work.  And we do.  Thus we are greatly benefited by our deep bench of eager volunteers.

I came across the below blog entry today, The 6 People You Need in Your Corner, by Jessica Hagy, on FORBES.  (Original posted here.)    I couldn't agree more.  It helps tremendously when we realize what kind of volunteer we are, but also to recognize the unique strengths offered by people with characteristics other than our own. 

Where do you fit in these six?  I don't think any of us are only one of them, all of them, or none of them.  We are mixes, mutts of several of them.  But the key is to know who you are, what the organization can look to you to bring to the 'curve making' party.  (I know I am an Instigator, mixed with a Cheerleader, Connector and Example.)   What are you?  We need and welcome all types.  I hope you have people with mixes of these six characteristics on your company/firm team too.  If you don't, seek them out.  Some of us are more of a pain than others, but all are vitally important.

The 6 People You Need in Your Corner

Jessica Hagy, FORBES Contributor

Nothing incredible is accomplished alone. You need others to help you, and you need to help others. With the right team, you can form a web of connections to make the seemingly impossible practically inevitable.

The Instigator:
Someone who pushes you, who makes you think. Who motivates you to get up and go, and try, and make things happen. You want to keep this person energized, and enthusiastic. This is the voice of inspiration.

The Cheerleader:
This person is a huge fan, a strong supporter, and a rabid evangelist for you and your work. Work to make this person rewarded, to keep them engaged. This is the voice of motivation.

The Doubter:
This is the devil’s advocate, who asks the hard questions and sees problems before they arise. You need this person’s perspective. They are looking out for you, and want you to be as safe as you are successful. This is the voice of reason.

The Taskmaster:
This is the loud and belligerent voice that demands you gets things done. This person is the steward of momentum, making sure deadlines are met and goals are reached. This is the voice of progress.

The Connector:
This person can help you find new avenues and new allies. This person breaks through roadblocks into finds ways to make magic happen. You need this person to reach people and places you can’t. This is the voice of cooperation and community.

The Example:
This is your mentor, you hero, your North Star. This is the person who you seek to emulate. This is your guiding entity, someone whose presence acts as a constant reminder that you, too, can do amazing things. You want to make this person proud. This is the voice of true authority.

Monday, July 16, 2012

The VC industry is broken. So now what?

   This was originally posted here.

OMG!  These returns!
The investment team at the Kauffman Foundation believes the venture capital industry is broken and they — or rather investors in VC funds — are partially to blame. The report condemns venture firms for being too big, not delivering returns, and not adjusting to the times. But then it blames the situation on a misalignment of incentives: Namely, limited partners that invest in venture firms have done so in a way that encouraged VCs to raise huge funds at a time when huge funds weren’t really warranted. And now, for the Kauffman Foundation at least, the chickens have come home to roost. From the report:
The most significant misalignment occurs because LPs don’t pay VCs to do what they say they will — generate returns that exceed the public market. Instead, VCs typically are paid a 2 percent management fee on committed capital and a 20 percent profit-sharing structure (known as “2 and 20”). This pays VCs more for raising bigger funds, and in many cases allows them to lock in high levels of fee-based personal income even when the general partner fails to return investor capital.

A smaller VC industry is needed

The solutions to the problem — changing the compensation structure, investing in smaller funds where the partners have also committed at least 5 percent of their own capital, investing directly in startups or alongside funds at later stages, and taking more money out of the over-saturated VC market — are already happening. Look at the widespread trend of angels or smaller funds created by a few investors. Or look at the rise of hedge funds orDigital Sky Technologies’ investing directly in hot companies like Twitter or Facebook at crazy valuations.
It’s unclear if other LPs will take the advice issued in this report, but the trends around VC investment these days are fairly clear. There are plenty of firms willing to put small amounts in at an early stage, so they have the option to keep playing if the deal gets hot. And they are just as likely to drop firms quickly around the second (Series B) fundraiser if they aren’t shaping up into a Pinterest or a Spotify. This hit-driven style of investment is a symptom of too much money chasing a new type of startup, and it’s likely that venture investors will compete until much of the return is squeezed out of a hot deal. And that’s no good for limited partners either.
The Kauffman report lists the ways it has decided to solve the mismatch between LPs and venture firms, and it goes into a lot of depth on how to improve the industry overall. But if one agrees with the assessment and solutions offered in the report, it also will result in some serious questions about the startup economy. The venture industry invested $28.4 billion into 3,673 deals in 2011, according to the NVCA and the PWC MoneyTree report. About 50 percent of their total investments were in seed and early-stage companies.

Does less venture money mean fewer startups?

Following the Kauffman Foundation’s suggestions means the pool will shrink. In many waysthis is a good thing, as there will be less money chasing the few standout deals, but it also opens the door to thinking about building companies in a connected era. Angels are already picking up some of the VC slack and will likely continue to do so. Once Facebook goes public, I expect we will see a host of newly minted millionaires playing at being an angel or perhaps taking their riches and using it to build something new.
For those without soon-to-be-liquid options, Kickstarter and the gold rush promised by the JOBS Act are also likely to fill the gap. So it’s entirely possible the pool of venture capital will shrink while the pool of startups will remain about the same. In such a scenario, VCs, angels and then the rest of us play the role of investor. It’s a role millions already undertake, withKickstarter’s seeing $200 million pledged and 22,000 projects funded since its founding.
And the passage of the JOBS Act means startups can now beg for money among the ranks of friends and family who aren’t accredited investors. I for one am leery of this development, believing it ripe for scams. The law also has the side effect of cloaking information about companies until right before they hit the public markets, which I think is the exact opposite of what a bill that encourages consumer investment ought to do. But still, there will belegitimate companies that will be able to start businesses thanks to the bill.
And as lawyers and entrepreneurs get comfortable with the law, new funding platforms should arise. So perhaps the Kauffman Foundation will find itself on the cusp of a trend, from the old-school style of fundraising where an entrepreneur has few choices and has to play by the VC industry’s rules to a crowdsourced and connected era of raising capital that mimics how the Web is changing a variety of businesses. Maybe the VC industry is like Motown. And it’s going to have to adjust to the new reality.

Saturday, July 7, 2012

The Promise of Crowdfunding for Social Enterprise

This blog originally appeared here
By Doug Rand, Senior Policy Advisor, White House Office of Science and Technology Policy.
Earlier this month, the White House hosted a briefing for the American Sustainable Business Council, a national network serving social enterprises from early-stage startups to established success stories, like Patagonia and Ben & Jerry’s. Senior White House staff took time to meet with chief executives and thought leaders, such as Seventh Generation founder Jeffrey Hollender and Stonyfield Farms pioneer Gary Hirshberg, to discuss many aspects of the President’s agenda to support overall economic growth, including the Impact Economy.
As part of the conversation, the discussion focused on the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act is a bipartisan bill signed by the President into law in April that will allow small businesses and startups to raise capital from investors more efficiently, leading to faster growth and hiring.
One of the key features of the JOBS Act is to enable “crowdfunding” – letting companies raise up to $1 million in small increments from many investors. As the President said, this is “a potential game changer”:
Right now, you can only turn to a limited group of investors -- including banks and wealthy individuals -- to get funding. Laws that are nearly eight decades old make it impossible for others to invest. But a lot has changed in 80 years, and it’s time our laws did as well. Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.
In many ways, nonprofits and social enterprises are already adept at raising money through crowdfunding – think of donation-based tools like Network for Good or zero-interest microfinance platforms like Kiva. What the JOBS Act will do is allow micro-investors to purchase a stake in the venture.
Many social enterprises already have benefited from donation-based crowdfunding platforms, and they are looking forward this new opportunity to attract impact-minded investors. Two such companies guest-posted on the White House blog, and their founders attended the JOBS Act signing ceremony: Stockbox Grocersbuilds tiny grocery stores in urban “food deserts,” while LuminAID Lab manufactures solar-powered lights for disaster relief. Both companies stress the power of crowdfunding to connect social enterprises with their communities and customers.
At a time when nonprofits are struggling for revenue, as charitable donations have slowed and government budgets are tight, the social sector needs to find new strategies to attract resources. The Obama Administration has taken some important steps toward this end, developing policies and programs to unlock capital and to increase investment. For example, the Administration launched the Social Innovation Fund to provide growth capital to high impact nonprofits. In two years, it has catalyzed nearly $400 million toward communities’ solutions. The Treasury Department recently updated the example Program Related Investments, providing guidance that should facilitate the flow of impact investing from foundations and philanthropists to support businesses and nonprofits pursuing charitable purposes.
Building on this momentum, crowdfunding offers tremendous promise. Some believe that it has the potential to revitalize underserved communities by improving access to capital for small businesses. As the leader of a major group representing Main Street microenterprises recently wrote, “Given the tremendous demand for credit among microbusinesses and entrepreneurs, crowdfunding offers real promise for underserved business entrepreneurs and may allow the organizations that serve them the ability to reach even deeper into the entrepreneurial community.”
To be clear, investment-based crowdfunding is not legal just yet. Congress required the Securities and Exchange Commission (SEC) to write new rules of the road for crowdfunding, which will be finalized in 2013. Some open questions include the following:
  • Any company raising money through crowdfunding must use an SEC-regulated intermediary. How should these intermediaries be required to educate investors, safeguard investor privacy, reduce the risk of fraud, and ensure other investor protections?
  • In any given year, investors are limited in the total amount they can invest across all crowdfunding investments (5% of annual income or net worth if less than $100,000, or 10% of annual income or net worth if greater than $100,000). How should intermediaries be required to verify that investors stay within these limits?
  • What disclosures should be required of the companies raising money through crowdfunding, above and beyond those spelled out by Congress?
The SEC has invited members of the public to submit comments to inform their rulemaking. These comments could include considerations unique to social enterprises, along with those investors willing to trade some financial return for greater social or environmental benefits.
To provide comments on crowdfunding, read the JOBS Act and visit the SEC comment page

Tuesday, July 3, 2012

Tenacious D

The SEC has announced that it will hold an open meeting to consider rules to eliminate the prohibition on general solicitation in offerings made under Regulation D under the Securities Act of 1933.

Since this is the first of the real deadlines under the JOBS Act – the SEC was required to “revise its rules” in this area within 90 days from April 5 -- some have asked whether the delay in taking action has negative implications for the timing of crowdfunding rules.  The answer is “not necessarily.”  Regulation D sits within a web of inter-related rules, and its provisions cannot be changed without affecting many of those other rules. 

For example, the SEC is also directed to permit general solicitation in Rule 144A offerings. Most Rule 144A offerings include a Regulation S component.  Regulation S prohibits “directed selling efforts.”  Directed selling efforts are very similar to but not exactly like general solicitation (and present their own policy issues).  If general solicitation is permitted but directed selling efforts are still prohibited, the resulting confusion could adversely affect international markets.  And there are similar issues with respect to a number of other rules.

Crowdfunding rules do not pose the same bundle of challenges that changes to long-established rules like Regulation D do.  Writing rules from scratch can sometimes be easier than revising rules that have been in place for decades.  So we would not necessarily read any significance into this delay.  Especially since Chairman Schapiro said in Congressional testimony last week that she didn’t anticipate failing to meet the crowdfunding rule deadline.