The Crowd's Money Can Dominate Early-Stage Investing -
But Only If The VCs Get Their Cut
Who needs VCs then, right? Some of AngelList’s
most predictive data has to be which investors have committed to participating
in a particular round. Said differently, a VC’s vetting process is likely
a critical input to AngelList’s approval engine so the crowd could never
actually replace professional investors in this model. Not to mention that
someone still needs to structure and lead the transactions as well as represent
the security’s voting rights.
In that sense, the crowd’s money would only complement
professional investor dollars, producing many more and less risky Series A
investment opportunities. Perhaps a whole lot of them. Maybe the NVCA should
throw a banquet in AngelList’s honor?
In an end-state where AngelList’s crowdfunding service
has proven viable, perhaps they’ll find ways to broaden the Crowd’s investment
capabilities to handle larger amounts, follow-on commitments, etc. But the need
for VCs to both vet the deal and facilitate the transaction remains unchanged.
One thought, however: The VC’s value in AngelList
crowdfunding is likely not correlated with investment amount, meaning that $2
million from the right $50 million fund can mean the same as $20 million from a
$500 million fund. Perhaps the crowd would be interested in making up the $18
million difference.
So What’s The Damn Answer?
VCs are the Br’er Rabbit of the
startup ecosystem. They can appear vulnerable and don’t mind playing the woeful
underdog. But they invented the rules for the game that I’ve discussed. Any
sort of change is rarely more than an opportunity to outcompete one another.
The first few billion dollars of crowd capital will do
nothing but de-risk the deals VCs were going to do anyway. In the meantime, all
that crowd activity will fund development of deal-screening services that VCs
will use to improve their coverage and slim down their teams.
If the crowd is ever going to approach a 40 bps
allocation to startups (as discussed in part one), it’ll
be because the VCs engineered it and profited handsomely in the process. Their
revenue models and fund structures might shift, but they’ll continue to control
where the capital goes. View Full Text on TC
