Crowd Funding– Boon or Blow for Venture Capital?

Originally published in UT San Diego, June 19, 2012

The JOBS Act and crowd funding — are they the new paradigm?

The act is designed to allow small companies to go public with less red tape and fewer Securities and Exchange Commission regulations. Crowd funding is a model that allows the little guy, the small investor, to invest in promising young companies and give himself the opportunity to lose his shirt, same as the big guys who bought Facebook at $38 per share.

In early June, at the 10th Annual Venture Summit, sponsored by the San Diego Venture Group, 650 entrepreneurs, innovators, service providers and venture capitalists descended on the Manchester Grand Hyatt where they mingled, perused the 30 cool companies that were being showcased, and listened to Roger McNamee, an icon of venture capital.

The previous night, the venture boys and girls went to a ballgame where the Padres beat the Giants, and yours truly decided to ask one big question: What impact, if any, will the JOBS Act and crowd funding have on venture capital?

Here are some of their thoughts:

Brad Webb, Claremont Creek Ventures, said that since the SEC had not issued its final regulations, it was too soon to give an opinion, but he did not see a tremendous impact on venture capital firms because the crowd would be too small. And if the company gets any dough, it will still need to come to a venture firm for the next round. Claremont has done two deals in San Diego, EcoATM and Genalyte.

Jim Dovey, Meritage Funds, said that neither would have any impact because “the government screws everything up anyway.”

Jon Belamonte, Cedar Ridge Ventures, said that it would help his firm “fill out a round” and that it would let the little guy into more deals.

David Coats, Correlation Ventures, and Navid Alipour, La Costa Group, both said that it would allow them to raise money from the public more easily. Current rules prohibit smaller venture firms from advertising or soliciting investors without a previous relationship. Now, they could legally take out a billboard on Interstate 5. They said that the crowd might compete with angel investors but not with real venture capitalists, and Alipour was skeptical that one could marry the crowd with professional investors.

The general consensus was that a company in which 500 guys have each invested $1,000 is a recipe for disaster, and a professional venture capitalist won’t invest.

Peter Solvig, Sigma Partners, believes that the act will benefit little companies going through the initial public offering process.

Skip Glass, Foundation Capital, said that the biggest challenge facing young companies in San Diego was finding enough really great talent. Startups think they need capital, he said, when what they really need is the best talent.

Finally, I spoke with Roger McNamee, Elevation Partners, who has been in the venture racket for 30 years and has amassed a hugely successful track record. He is truly one of the monsters of the midway in Silicon Valley (a mixed metaphor if you are not from Chicago). He had little to say about crowd funding, but in classic political speak, he answered the questions that interested him.

What was on his mind was innovation. He contends that the rate of innovation is constant, and that on average there are about 10 really good companies in any cycle — not each year — but in a cycle that might be two to four years. He thinks people grossly overestimate the number of good ideas that are around at any given time and that most venture capitalists are not in those good deals. And in this case, he knows whereof he speaks. His latest liquidity event was Facebook.

He feels that most startups are “doomed at their starting point” — that they should spend more time at the beginning thinking carefully and not immediately whipping out some code.

McNamee is living large. His investment partner is Bono, and he plays in his own band, MoonAlice, 100 nights a year. Currently, he is wound up about HTML 5, and he believes that “individuals can have a huge impact on technology.”

Rule No. 61: Beware the wisdom of crowds. A lemming with a great idea is still a lemming.

The Atlantic Meets the Pacific conference returns to San Diego on Oct. 7-9. This year’s speakers include Stacey Snider, co-chair and CEO, DreamWorks Studios; Chris Cox, VP of products, Facebook; and Gretchen Rubin, best-selling author of “The Happiness Project.” University of California San Diego and the Atlantic magazine are offering our readers a special price of $495 (vs. regular price of $795) if you sign up by July 1 at atlanticmeetspacific.com and use the promotion code NEIL.

Neil Senturia and Barbara Bry, serial entrepreneurs who invest in early-stage technology companies, take turns in writing this weekly column about entrepreneurship in San Diego. Please email ideas to Barbara at bbry@blackbirdv.com

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