Startup Funding Process Improved
The process for funding startups has just improved – if you’re a startup:
Money tends to come from exclusive, geographically concentrated networks of entrenched investors, and deals are driven largely through word-of-mouth referrals, the accumulation of various status markers, and a long series of often elliptical conversations and in-person meetings.
But that’s about to change. This week, the Securities and Exchange Commission approved rules that will begin to open, accelerate, and more deeply systematize the process of raising money for startups. The immediate effect of the SEC’s action is that startups and certain other money-raising entities, like hedge and venture capital funds, will be allowed to openly seek and advertise for investments, a process known as “general solicitation.”
For those of us of a certain age, it is just hard to believe this is changing. I can’t tell if this will be good or bad for investors, but it will be great for startups that can take advantage of new fundraising and liquidation options. But what about the process? (emphasis added):
The long-term impact will be even deeper, bringing the process of funding of startups onto the internet, where it can be de-mystified, atomized, and mechanized in the sort of digital transformation so many startups have themselves brought to other industries. These effects will initially accrue to the benefit of a relatively limited set of players, chief among them startups and funds that have had trouble raising money, because they’re, say, outside of traditional hubs like Silicon Valley or they’re not in hot sectors like tech. But the new rules will also benefit those who will help facilitate the process of general advertising, including a variety of startup investment portals and legions of old-school investment brokers and advisers.
One of the beneficiaries is assumed to be SecondMarket, which has already made a name for itself by revising the startup funding process, and providing private market liquidity options for employees of large private companies that have yet to go public. Previously this was all done without (much) solicitation. Now they have the opportunity to sell their methodology for accrediting investors to any firm that wants to raise money, not just to firms doing private placements of employee stock.
It will be really interesting to see how that shakes out in the market.