Late last year, a wireless power startup called uBeam committed a desperate act.
It raised money from accredited investors through the crowdfunding portal OurCrowd.
That’s no sin in itself. What made it so horrific was doing so following a round where only major venture capital investors participated.
UBeam got slammed in the press.
“Abnormal”… “desperation”… “a strange sequence of events” were some of the comments in an article from the Los Angeles Business Journal.
What utter nonsense.
Such thinking reflects a bygone era swept away by the JOBS Act of 2012.
Before Congress passed the JOBS Act, fundraising followed strict rules.
Before you raised from strangers, you raised from friends.
Next was a seed round. Money was sought from a few plugged-in deep-pocketed investors.
Then came the Series A round, the first of the institutional rounds.
The growth rounds followed. These were the rounds where VC investors looked for exceptional revenue growth.
With each subsequent round, a little more is known about the company and its prospects. Amounts raised increase. Risk decreases.
And as risk goes down, share prices go up.
That’s the way it was for a very long time: a simple progression that made sense.
It’s also ancient history.
Companies now have more choices. And you can thank the new equity crowdfunding (ECF) rules.
They make up two basic but distinct groups. The companies in the first group, listed on the StartEngine portal, are using Reg A+ for their first major raises. Their characteristics are…
- Usually bootstrapped (little salary, tight budget and no outside funding)
- No revenue and big debts for most
- No previous investor track record/affirmation
- Early traction (for some, not all).
The companies in the second group, found on the SeedInvest portal, are pursuing Reg A+ raises following successful institutional rounds. Their attributes are…
- Millions of dollars already invested by well-known VC companies and/or angels
- Emerging revenue and smaller debts (because of money already raised)
- Strong investor affirmation with Andreessen Horowitz, Mark Cuban, Michael Loeb, Kima Ventures and Index Ventures investing in earlier rounds
- Strong traction (for many).
And DSTLD‘s sales. It has sold 30,000 jeans while increasing revenue by 482% year over year.
Should You Invest Like Mark Cuban?
The second group has a more consistent traction record and lower debt. But these differences are inconsequential against a much bigger difference.
One group is oozing with major investor affirmation. The other group has none.
Choosing which group to invest in should be a no-brainer, right? Not so fast.
Before investing in the companies that Andreessen Horowitz or Mark Cuban like, you need to ask yourself this one question.
Why didn’t these VC investors insist on doing another round with these startups if they were so enamored with them?
Put another way, if these same VC outfits are putting millions into companies raising Series A or B rounds, why did they choose NOT to do so with these startups?
As with many things, it’s not so black and white.
If the startup loves the VC investor… and if the VC company loves the startup back… and if the VC company’s help is critical… and if the startup isn’t worried about ceding too much influence/control to the VC… and if the VC company indeed has the funds to invest…
So many “ifs.”
On top of this, we must also consider the fact that VCs often get it wrong.
Take top investor Peter Thiel, for example. He’s still kicking himself for not investing in Facebook’s Series A, after investing big in the earlier seed round. (Although he still made billions.)
An Existential Threat?
The point is, most of these startups like the idea of getting money from the same people who love their products. It’s an opportunity to excite and cement their user bases – and the source of their future revenue streams.
For many founders, raising funds and promoting their products/services at the same time are tough to pass up. I don’t blame them.
It’s not far-fetched to see how the new Reg A+ rules can replace dozens of the big VC investment firms with thousands of everyday investors.
Actually, it’s here and happening right now.
But I don’t think it’s a game-ending threat to VCs.
Founders can now pursue a strategy of raising money that integrates institutional opportunities with ECF opportunities. VCs will have added flexibility in choosing which startups they do follow-on investments with. The “abandonment” issue becomes less of a problem.
I see it working for both sides.
We’re Just Getting Started
It’s no sin if companies do a following round without the participation of their VC investors, as uBeam did. So I lean toward the second group.
With that said, I have a few caveats.
First, I have to be absolutely sure that non-participating VCs don’t think they’ve made a big mistake… about the company’s execution abilities, technology commercialization potential or whatever.
As long as I do this, investor affirmation will remain a critical factor.
Second, I haven’t dug deeply into these companies, which is imperative before any decisions are made.
Third, this is a small sample. And all of this is in its early days.
Changes are coming fast and furious. Exciting, right?
Invest early and well,
Founder, Early Investing