August 21, 2012
As founder of angel investor group (Oct 2003) and a leader in my industry of managed angel groups, I submit these comments:
First, I am in favor of crowdfunding. It appears that it could be an effective means to aggregate friends and family funding. In the life cylce of start-up companies, this is usually the first round of funding that allows the founders to prove their concept.
For small operating businesses (main street types), crowdfunding also has the opportunity to help those companies that are not quite bankable, but could get the necessary financing to help them buy equipment to turn the corner or fund inventory to export a new product line.
However, I have concerns that crowdfunding could have a perverse impact on high growth companies and could result in opposing the intent of the JOBS bill. Crowfunding portals that will deploy equity for investment dollars could spell the end for capital intensive start-ups, like life science companies, clean tech companies, and advanced manufacturing. Unsophisticated investors that invest via an equity crowdfunding portal can prevent the company from getting the follow-on funding needed to scale to a larger operation. If the equity is not structured in a simple format that provides the start-up with the power or authority to raise additional capital from angels or VC's, it would likely spell "death" as an ongoing concern.
I have witnessed this even with companies funded by unsophisticated angels (accredited investors). There was a great little software company in Cleveland that gave a couple of unsophisticated investors voting power to prevent follow on funding. That company is no longer in business. Also, we just watched a terrific company in Erie, PA go dormont - with a terrific medical device - because the founders took money from investors that lacked the knowledge about the proper "investment vehicle structure" that would attract follow-on funding. This scenario has the potential to be widespread and rampant if equity crowdfunding allows cowboys to be cowboys.
I have said this before to others: imagine a Seattle without Microsoft or Starbucks. Imagine Palo Alto without Intel or Google. That can become a reality if rule making for Crowdfunding does not attend to the needs of High Growth Companies. High growth companies require large amounts of capital and will need to be funded by sophisticated investors in order to scale to their potential. (Sophisticated = sophisticated angels and venture capitalists) Without the investment structure that attracts follow-on capital, the intent of the bill will not be fully realized. I likely don't need to comment on the potential negative impact on our economy and our ability to compete with China.