With Crowdfunding Legal, Incubators Are the New VCs

Let the speculation begin! With HR 3606, the Jumpstart Our Business Startups (JOBS) act, officially signed into law, innovative start-ups can now leverage crowdfunding to bring their ideas to market. So what does the post-JOBS world look like? Lots of people are going to be adding their own speculation over the next couple of months while the Securities and Exchange Commission (SEC) finalizes its crowdfunding regulations, but here is my take: Incubators will be the new venture capitalists.

Right now, we have a world where a small number of very large Limited Partnerships (LPs) are constantly on the lookout for seemingly smart people to invest their money for them. These funds claim expertise on the basis of forward-looking investment theses and their track record of success.

With crowdfunding in the game, we’ll see a significant uptick in the amount of “dumb money” floating around, looking for a way to get on the Next Big Thing. This in turn creates huge demand for smart signals. As a result, there will be an explosion of new groups, each vying to be that signal that brings the crowd flocking in. In this early “gold rush” phase, the standouts will be the ones with demonstrable track records; in particular, the Y Combinator/TechStars model will have the early lead.

Why? As we’ve already seen, mobile, social and web apps can scale quickly on short money; good signaling and networking go a long way. With these sorts of businesses, crowdfunding can literally build a company out of nothing.

Let’s examine some other ideas:

Vetting: Some groups want to just focus on due diligence. The problem is that at the very early stage, there just isn’t enough material to vet. Even the kinds of startups that crowdfunding is perfect for (using the crowd for that first $1M raise, rather than the traditional angel investors) still need propellant and guidance.

Crowdfunding Forums: We’re already seeing the launch of dedicated crowdfunding exchanges; ultimately, one of these will end up as the NYSE of crowdfunding. Will it be yours? Probably not. There will be a proliferation, format war and ultimate consolidation over time, but different forums may stay fragmented for some time, and individual “signaling groups” will probably try to retain their own platforms for as long as possible.

Will Crowdfunding Threaten Venture Capital? No way. Why? Because of VC’s ability to follow on. While some commentators feel that crowdfunding has a clear advantage, startups will still need to draw on VC in order to raise additional capital past that initial investment. Too, VC benefits from the de-risking effects that large influxes of crowdsourced early-stage investment bring to the table.
And just to bring it back down to earth: remember that the SEC will try its hardest to keep a tight leash on crowdfunding efforts. Opening early-stage investment to the masses runs the risk of allowing a lot of people to lose a lot of money, a fact SEC regulators are keenly aware of.

 [This article is cross-posted at BostInno.com.]

About author
I'm the former manager of Fraunhofer CSE's TechBridge program, dedicated to supporting the commercialization of promising new cleantech innovations. All opinions expressed are my own, and don't represent an official endorsement from Fraunhofer CSE or the Fraunhofer Society.
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