I have spent years raising money for smaller companies. Months went into business plans, collecting data, weighing up words, balancing power point presentations, talking with advisors and covering my rear end under the leadership of gangs of lawyers, accountants and corporate finance advisors.
Armed with the results I must have worn out countless pairs of shoes going from one VC to the next, business angel networks, and more advisors. In the end I have always managed to raise the money needed but the cost has been obscene. The fees to all the advisers, wonderful as they have been, the warrants that were demanded, the equity shares and then of course whatever could be taken off me. Whilst I have done well out of this, I have always felt that the back seat drivers got a disproportional share and judging by the flash cars they drove to the various meetings, I suspect I am right.
If you have a great idea, limited resources in terms of money and time, this method of fundraising is incredibly demoralizing, exhausting, frustrating in additional to be costly. Worst of all, it is destructive to the business. Each time I have raised money, despite our very best efforts, the business suffered as the management team was distracted, if not obsessed by the fund raising. For a small company this process is virtually unsustainable.
So what is the answer? Well, surprise surprise, I believe the answer lies in crowdfunding. Yes I have heard all the arguments about fraud and lack of regulation, etc, etc. In fact it is the complete openness of crowdfunding which makes it attractive. The cost of complying with regulations for small companies is beyond belief and whilst I agree completely with the intention, I do find it galling the way the banks have shown that regulations are for losers, not for them.
Rather than a series of expensive and disengaged advisors trying to make sure you have a disclaimer to avoid clause 1,567,233 of the blah blah blah act, the social media, search engines, forums, etc, etc will keep an eye on what you are presenting. If you say you have plans to make the best mobile app ever, you will need to make a very convincing case, or you will be slaughtered by the crowd. Why did Encarta fail and Wikipedia succeed? Because of the crowd!
Of course VCs, business angels and others can still participate. They will have the information they need to make a decision, they can ask all the questions they want and they can even invite the management to meet with them. Nothing changes there and in fact I strongly believe they could bring their costs down considerably allowing them to invest more in companies and less in overheads. Of course they could also upgrade their Range Rovers every year rather than every other year with the savings, so we clearly all benefit.
No longer though can they force management teams to sign exclusivity agreements locking you and me out from investing in the next big thing. No longer can they play their little structural games strangling the entrepreneur. No longer can they slip in the fees, warrants or board control many of us have seen so often. They will also have to submit to the power of the crowd.
The one thing we do not want of course is pushing some idea through crowd funding and going after the life savings of our pensioners (assuming we will have pensioners at all in our futures). So we will have to be careful about how the information is disseminated, but even now, with all the regulations and so called safeguards, there are people who will respond to the ‘Dear Friend’ letter from the wife of some former finance minister from say Nigeria we have never heard of.
Even now we find that very regulated firms like Barclays need to be fined £290 million for what is said to be outright fraud.
Even now we spend billions on court cases trying to prove breach of regulations, usually without much success because the defendants have the better lawyers.
I have no doubt the time for crowdfunding has come and I think the biggest threat is that it may put a lot of our advisors out of business. Perhaps we need to crowdfund a new car auction site for all those BMWs coming onto the market.