Crowdsourced VC Fund

James just wrote in the following, which I like his thinking — I just quite honestly have no clue how this could/would work:

I love the idea for a massively transparent startup process, and i look forward to participating.

That having been said, I’m not donating because you don’t pass either of my investing filters:

1. Is RS (ringside startup…) going to help make me money?

No. Being listed on the contributor page doesn’t count.

2. Is RSS a worthy charity?

No. Much more worthy funds out there.

I think your idea would be much better if you did give equity, and gave higher equity to those involved earlier in the process.

Just like the real thing!

What about all this SEC nonsense?

I guarantee that there are ways around it. Your investors need to organize their own fund, and invest as essentially a single investor. Each time investors create a fund, you should negotiate with them an equity rate just like you would with any VC.

The big problem, of course, is setting up the crowdsourced VC fund. That’s not my business, but I would invest in such a fund. And I’d like to see your venture help in the development of these kind of crowdsourced funding projects.

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  • http://blog.jparkhill.com Jay Parkhill

    James,
    This is a great comment. I think myvc.com tried to move in this direction before it ran out of gas.

    The trick is that this would essentially mean creating a VC startup to fund the ringside startup (and something else to fun the VC startup, and . . .)
    .
    Maybe Steve could put this in the pool of ideas to run with, though on the scale of cash-intensive business models a crowdsourced VC fund would probably rank quite high. I doubt that $20k would go very far down that road.

    Jay

  • blink

    There was a company back in the Web 1.0 days called Offroad Capital. They acted like a private equity broker, managed the whole process and required companies they handled to submit regular reports, just like the SEC (but less rigorous).

    Interesting project. I agree with James, you need to offer a real piece of the pie. Break off a chunk of equity, i.e. the max you will sell for the initial $20k. Price it in 2 or 3 tiers, folks who buy in during the first 10 days get a better price than folks who come in after and so on. This way there is no negotiation, they know up front what they get and based on when.

    This maybe more complicated than necessary, but what about setting up an LLC or limited partnership that holds the “Sponsor equity”. They buy into the LLC/LP and get a percentage of the LLC/LP according to how much and how early they signed up. Seems to me this wouldn’t be too complicated to set up, and folks joining a partnership or LLC gets by those securities issues. There is probably an easier way to do this, but this is what popped into my head after reading this post.

    Might want to look at TechStars or YCombinator to get a reasonable proxy for how much equity you should plan on giving away for $20k.

    good luck!

  • http://justchris.net Chris Conley

    I spoke with an investor a couple of days ago after Steve sent me on an idea storm(much like his with Twitter:) ) running around different variations of RSS. As everyone pretty much agrees, to draw up more interest, there needs to be some equity offering.

    The investor pointed me a doc from SEC, http://www.sec.gov/info/smallbus/qasbsec.htm#eod6 which explains raising capital for small businesses. The most interesting section of the doc is a list of exemptions to raising equity without registering with the SEC. The problem with all of the exemptions though is that “you may not use any form of public solicitation or general advertising.”

    This is understandable; you don’t want someone with ill intentions advertising massive fortunes with the intent of running with the money. Though there should be some way that makes it legal to legitimately raise small amounts of capital in exchange for equity to the public.

    Anyway, here are my two cents to boost interest without offering equity:

    -Show everyone you believe in this by investing some of your own money into the startup. blog.wired.com/business/2007/03/want_vc_be_will.html
    -Instead of donating advertising space to contributors(in effect, selling it), why not set up a formal advertising campaign and put all proceeds towards this project?

  • http://www.google.com Matthew Markus

    Here is an idea. Let every donor get one vote per $1 donated. Once you reach the $20K milestone, have each donor allocate his/her votes to one or more charities/universities. Then, donate approximately 50% of the common stock issued at incorporation to the three charities/universities with the most votes. This turns the whole thing into a competition (e.g. Stanford vs. Harvard). Furthermore, you do not have to worry about the SEC. You could call it “charity amplification” or something since, ideally, you are attempting to amplify the value of each dollar donated through your capitalistic pursuit. Good luck!

  • Alexey

    I agree with James. Some sort of workaround for equity in everything-but-name is a prerequisite for anyone making significant donations (why do I want greater voting power in an unbuilt something I cannot stand to profit from). The advertising for $150+ may work as well but it is a less than ideal solution.

    Any lawyers have concrete for-profit workaround proposals?