Friday, August 13, 2010

More Thoughts on Crowdfunding your Startup

Today, I attended a great RTP event featuring Mark Cuban.  (Thanks to my friends at Southern Capitol and Intersouth for sponsoring it).

The event triggered many thoughts about entrepreneurship that I will share over the weekend.  However, the most interesting part of the event was probably a discussion on the panel that focused loosely on crowd funding.

I've recently been thinking a lot about crowdfunding startups and the various legal and regulatory hurdles to making this a reality.  In my mind, our current regulatory scheme is a classic baby/bathwater problem where our government, in the interest of protecting against a small number of bad actors, has instead made it exceptionally difficult for the vast majority of honest, hard working Americans to invest in startups and share in that portion of the American dream.

The flip side of this is that our government has made it exceptionally difficult for most startups to find sources of equity capital.  The recent changes limiting who can qualify as an "accredited investor" are just the latest of many examples.

On today's panel, there was a great discussion of exactly this issue.  It began with Mark Cuban stating:
We don't have a country of investors anymore.

His point was that innovation is driven by both entrepreneurs and investors and that, without both, innovation and our country will suffer.

Mark's first recommendation was to eliminate capital gains tax on any equity held for more than 5 years.  This would benefit both the founders and their early investors and could provide a huge boost to early stage equity investing in and of itself.

However, the discussion continued with Mark saying:
There should be a way for more of our money to go into something great.

He continued by saying that what we really need to do is "create a different kind of market."  Not the NASDAQ or the NYSE, but a market focused on providing liquidity to early stage companies.  The discussion moved on to the well-documented death of the boutique investment banks that led the IPO boom of the late 90s.  But his point is well taken, the existing public equity markets are no longer an appealing exit for most early stage companies.  And the existing private equity markets are incredibly distorted by regulation which makes them unavailable to the vast majority of potential investors.

At this point Aaron Houghton, co-founder of iContact, made the following excellent points:
What we need to do is open up the long tail of the capital markets.  If we can do this, we will turn everyone back into an investor.

This is exactly right -- the long tail of the capital markets (most retail investors) are only permitted to invest in pubic equities.  And public equities is not where the real innovation and growth are happening in our country.

One final note, a good friend -- Fred Bryant from Wealthforge -- is working on solving these issues around crowdfunding startups.  He was picked to potentially do a panel at SXSW on the subject -- you should definitely give him your votes.  Here is the link.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.