A truly new development in venture capital is the recent emergence of . . . online venture capital investment portals. These firms have increased significantly the accessibility of investment opportunity for the roughly ten million Americans who qualify as accredited investors. This in turn has increased accessibility of funds for entrepreneurs seeking venture capital funding.
These online firms actively invite entrepreneurs to seek funding from their investors. Some of these firms offer their investors dozens, and sometimes even a hundred or more, portfolio companies. Focus tends to be at the seed and early stages. Their investments in each company tend to average considerably less than $1 million, far less than more traditional venture capital firms and closer to what one might expect from an angel group. Some of these online equity crowdfunders even charge the entrepreneurs for the right to raise funds on their portals, so watch out!
A few of the leaders in this field include FundersClub, SeedInvest, and AngelList. These firms operate almost like venture shopping malls, bringing together potential investors with large numbers of ventures. They often fill the role of super-angel groups, serving as a conduit for experienced angel investors to build syndicates of individual investors on their sites.
These firms claim to perform substantial due diligence, and unquestionably some do, though we wonder about how much rigor is possible given the large numbers of portfolio companies offered. For perspective, our firm offers only four to eight deals per year, and reviews more than 100 ventures for every deal we offer. We also wonder how much value these new firms can add in helping to guide and mentor venture leaders, given the large number of ventures in their portfolios.
Nevertheless, for the entrepreneur whose money needs are more modest, this more accessible source of funding may work. However, of course, the presumed lesser degree of subsequent involvement with portfolio companies may reduce success odds for the entrepreneur. Because these firms are relatively new, it is too soon to demonstrate a meaningful track record in terms of successful exits for their investors and the entrepreneurs they are funding.
Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund