Tag Archives: equitycapital

Venture Capital Firms Bring in Money

Todd Crosland EntrepreneurshipVenture Capital firms have been in existence for years, yet they do not always bring in as much money as they would hope. This year, however, is different. Since 2016 began, these types of firms have been able to collect money at a rate greater than they have in fifteen years. More surprisingly, they are managing this feat even as the valuation of many startups begins to drop. Even as ‘unicorn’ startups become less enchanting in Venture Capital, investors are still reaping rewards.

Venture Capital firms have been able to raise over ten billion dollars since the beginning of the new year, at an astonishing rate. It turns out, while investments in startups are slowing, investments in Venture Capital firms are not. Of course, this was predicted last year. When polled, the majority investors in these funds announced that they would continue to match or increase the amount of money they were giving to firms. The firms, however, are the reason startups are having more trouble raising money.

Why is this, exactly? Well, IPOs did not have a good year in 2015. The market was unpredictable, and new companies focused on technology were not as impressive as they have been in previous years. The Venture Capital firms have chosen to dole out money more slowly because startup valuation keeps going down. They are simply not sure which companies are going to make money, and which will remain stagnant or fail. Entrepreneurs who take the billions in Venture Capital raised as a good sign must keep this in mind.

Venture Capital firms that are amassing this money have a few options for where to go from here. They seem to have given up on pouring money into late-stage startups, but may continue to focus on early-stage companies. At least early-stage investments have the ability to give investors a portion of return, therefore this may be the most viable option for Venture Capital firms.

However, this also calls into question how this will affect the slowing entrepreneurial boom in the United States. Of course, if Venture Capital firms choose to invest in early-stage startups, fresh faces in the startup world need not worry. However, that leaves later-stage startups out to dry. If the funding continues to shrink for these late-stage companies, which I suspect it will, we may see an increase in startups trying to exit more quickly than they would normally, or than others have in the past.

Now, entrepreneurs must focus on generating a positive cash flow. This is the only way to make sure that startup companies stay afloat, which may bring in additional funding along the way.

Equity Crowdfunding Legal in 2016

On May 16, 2016, Equity Crowdfunding for non-accredited investors will become legal. This was, of course, a part of the JOBS act that was passed in April of 2012, but the equity crowdfunding provision has been on hold and in debate for over three years. The Securities and Exchange Commission published extra regulations that finally got the provision passed.

This equity crowdfunding provision, also known as Title III, was in debate for such a long time because of the fear that it could invite more fraud. Title III, in its simplest form, is a provision that allows non-accredited investors into equity crowdfunding. Basically, the average Joe will now have the ability to invest in a young company. Title III was initially thought of as a way to keep up the incredible equity crowdfunding growth rate that has been seen for the past five years and now, with its implementation, this growth rate may even get larger.

Of course, there will be regulations. Title III is being implemented through broker-dealers and internet portals specifically designed to host public offerings. This means that anyone can invest in a company, but there is less of a chance of fraud and illegal activity. Additionally, there are limits on the amount of money that can be raised through one investor, which depends on the income of each individual investor. There are also limits on the amount of money that a company can raise through these portals within a 12 month period.

The companies raising money are required to submit detailed answers to investment questions before accepting any offers. This includes, among other items, the risk of investing in their company. There are many other requirements the startups must meet, and questions they must answer, before entering these secure channels to accept investments. However, the payoff in the end will be much greater, as now there is a wider population from which to accept investments.

Title III is a great way for new companies to find investors. It allows companies to advertise their offerings to the public, which was before illegal, and to freely discuss business with investors through secure portals. Although there is dissent, I believe that the implementation of Title III will do great things to the startup investment space. Although the significant regulations imposed on companies within Title III could be a barrier to progress, this provision will surely help more startups become successful.

For more information on the passing of Title III, read this article on Mondaq.