You wouldn’t have recognized the VC industry of the 1940s. It was puny. And it pretty much stayed that way throughout the 1950s, 60s and 70s.
Then the government decided to change the rules.
It issued the “Prudent Man Rule,” which allowed pension funds to invest in venture capital. It triggered a surge in VC investing.
From 1982 to 1987, VC funds raised $4.5 billion annually. It was just $0.1 billion 10 years before.
History is now repeating itself. The rules are changing once more. And the government is again opening up VC-like investing to new sources of capital.
Last time, it was the Prudent Man Rule. This time around, it’s the far more sweeping “Everyman” rules that are sure to unleash a new wave of early-stage investing.
We’ve talked about these “ground-floor investing rules for everybody” before. But in case you don’t know, they’re making it possible for everyday investors to invest in the early stages of a company’s growth through equity crowdfunding. (See here and here for more details.)
The Real Litmus Test
Aside from profit potential, there are many reasons to invest this early. (I’ll be writing a post on this very soon.)
Yet the number of investors migrating to this new way of investing has been modest.
Earlier this year, SEC Chairwoman Mary Jo White said, “The size of the 506(c) offerings are getting bigger by size, [but] not in numbers.” [506(c) raises allow startups to advertise their fundraises to the general public.]
White says that 506(b) raises “where there is not general solicitation” continues to be “a hugely vibrant market.” From when 506(c) became effective in 2013 through 2015, “you had about a $2.8 trillion-sized market for 506(b) and about a $71 billion market for 506(c).”
Why are 506(b)s dwarfing 506(c)s?
New 506(c) rules have allowed thousands of well-off but nonprofessional investors to back high-upside companies. But investing in these 506(c) companies is still limited to accredited investors only. The universe of eligible investors remains relatively small.
In the meantime, portals discovered they had plenty of accredited investors scanning their sites for 506(b) opportunities. General solicitation became less necessary.
The real litmus test is the new crowdfunding rules. They allow everybody, regardless of income or personal worth, to invest early.
Their impact should be huge.
40 Days to Go
Early-stage investing is already taking off, but only among professional investors.
There are more than 500 microventures now. At an estimated $50 million per fund, there is $25 billion of capital chasing young startups.
Seed-stage investing hasn’t taken off yet among nonprofessional investors. Things should pick up once Title III regulations come into effect on May 16. We have just 40 days to go.
These regulations will allow companies to raise up to $1 million from anybody.
But progress has been slow, sort of like this…
The incremental growth feels unremarkable – and even disappointing – until it shifts into higher gear…
Even Mark Zuckerberg is not immune to feeling this way. He underestimated the importance of mobile while it was in its incremental growth phase. It wasn’t until 2011 that he realized it was experiencing an exponential growth phase. Only then did he “suddenly” see the need to dramatically increase Facebook’s investment in mobile.
Insiders – those closest to the action – often lack the perspective and dispassion necessary to anticipate when growth will surge.
The deception is that slow growth will continue into the foreseeable future. When it doesn’t, you’re taken by surprise. It feels sudden, thrust upon you.
On the Verge
Good things happen when the government gets out of the way.
I believe that with the new “ground-floor investing rules for everybody” coming into effect, we’re closing in on an exponential growth phase that will look something like this…
Which is why I’m very bullish when it comes to the future of startup equity crowdfunding.
A loosening up of the rules sparked a huge growth spurt once before. I believe we’re on the verge of seeing it happen again.
Invest early and well,
Founder, Early Investing