Title III: Issues, Opportunities and Gatekeepers

Below is the ‘Tip of the Week’ transcript from the Podcast Ep46: The 3-year Wait is Over | SEC Vote on JOBS Act Title III (David S. Rose)

I wanted to take this weeks tip to talk about the implications of this ruling and how it may fit in with the existing funding landscape.

Let’s start off by looking at some elements, within startup fundraising that are directly correlated. This is not an exhaustive list and there will alwasys be outliers. But on average these items will move up and to the right. The higher one is, the higher the other is.

  • Quality of Startup & Valuation
  • Quality of Startup & Quality of Investors
  • Amount of Traction & Valuation
  • Quality of a Founder’s Network & Quality of Investors
  • Amount of a Raise & Stage of the raise (ie. Seed, Series A, B, C, etc.)
  • Due Diligence Required & Investor Sophistication

Based on these items, David’s opinion that this will serve as the new friends and family round has a lot of merit. If the investor group is passive, providing no value beyond their check, can only fund up to $1M per year for a startup and will be conducting no due diligence… it stands to reason that their participation will be very early, with limited or no traction,
lower true valuation and maybe even lower quality. If a founder can raise from value-added investors, they will. If they can’t, this may serve a a last resort for obtaining capital.

Additionally, it’s reasonable to expect that the profile of unaccredited investors will be similar to those that are currently active on donation-based crowdfunding platforms like Kickstarter. If we take a moment to look at the types of campaigns that are successful amongst these contributors, they include products, services or businesses that are:

  1. Very easy to understanding for a layman and
  2. The Startup is consumer and/or entertainment oriented

In fact the types of projects that get funded most often and at the highest amounts on Kickstarter include: film and video, publishing, games, art and design.

It’s hard to imagine a B2B company disrupting the industrial logistics space, for example, would play very well amongst the crowd.

One significant benefit that I can see coming out of this, has to do w/ standardization of docs and terms. Many in the angel and VC space have attempted to standardize early-stage investment docs, but we still have priced-rounds, convertibles, SAFEs and warrants… each with many permutations. I will be very pleased if an outcome of this ruling includes standardization of terms at very-early stages. Even if there were a few varieties, this would help tremendously w/ speed and transparency.

The final point I’d like to touch on has to do w/ our discussion on setting price. David pointed out today that this will be a one-sided negotiation, which is really not a negotiation at all. Founders will set price and the crowd takes it or leaves it. I can’t really imagine a steady-state fundraising environment where this persists. And the only thing I can think of that will address this is if reputable, credible ecosystem players become involved to vett the deal and set terms. I’d assume that unaccredited investors would be much more likely to fund deals that are organized and approved by someone they think they can trust. This emergence of the Gatekeeper, would create an opportunity for celebrity investors, organizations, or maybe even the funding platforms their selves, to vett, lead and organize these deals. Will the common unaccredited investor know who Paul Graham is? Probbly not. But, I guarantee you they know Mark Cuban. And I’m not suggesting that Mark will do this, just that there is an opportunity for credible corporate or personal brands to rally large crowds around an idea. And on that note, you may even see celebrity founders, funding their startups via this method… if nothing else, but to make a statement about crowdfunding.

That’ll wrap things up today on this special installment of TFR covering the Title III ruling. Thanks for joining us and remember to overprepare, choose carefully and invest confidently.