frankly speaking

Capital for Start-ups

Jason Calacanis asked an interesting question today when he asked “If a start-up could raise money on SecondMarket, why would they bother to go public?” Great question. I’d like to park it for a minute and give some background before I answer it. 

For the past couple weeks I’ve been thinking about ideas that would give start-ups better access to capital. Currently, one of the most difficult aspects of starting a business for a first time entrepreneur is raising money. To put in perspective, it has been said that it it is easier to get into a top tier university than it is to raise money as a first time entrepreneur. 

So how do we give these entrepreneurs better access to capital? A number of people have proposed the idea of developing open markets, similar to the Nasdaq or the NYSE where companies looking for capital could list, and potential investors could purchase equity in those companies. 

There have been a few companies that have even started facilitating this even further - companies like secondmarket, sharepost, and kickstarter facilitate the transfer of money between investors to entrepreneurs or ex-employees of start-ups in order to provide them with additional capital to fund their projects/business or to provide liquidity for shares of companies that have yet to go public. 

My idea is a step deeper than that. Why not let qualified investors (as defined by the Securities Act of 1933) bid on individual shares of equity from companies who are looking to get their ideas off the ground, or for companies who are looking start to scale their young start-up, but have not had success with venture capitalists.

For young companies and entrepreneurs, the benefits are pretty simple - they get access to the money the desperately need without the idea of wasting 2 to 3 months fretting over whether or not a meeting with a particular vc went well. Further, it will give entrepreneurs more control over how much equity they give up in their company.

For investors, it gives them better insight into what companies are seeking funding, and gives them more opportunity to spread their investments over several different companies (which decreases their risk, and increases their probability of investing in a winner). Further, it gives investors the opportunity to allocate their capital quickly into companies that they perceive as winners, and cut their losses from companies that they perceive as losers.

The purpose of this market would simply give ideas and companies with little traction a better chance of getting off the ground. The idea is limited to qualified investors, because these are investors who are capable of accepting higher risk, and the money from this group of investors is in a sense, finite. If companies want or need access to more capital, it may make sense for them to transition to the traditional (old school) capital markets and get it from everyday investors.