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VCs Crowded Out?

document Crowdfunding

Vc Fred Wilson Says Crowdfunding A Game Changer For Vcs - Daily Brief - Portfolio.com

http://www.portfolio.com/views/blogs/daily-brief/2012/05/08/vc-fred-wilson-says-crowdfundi...

by Teresa Novellino

Main
(http://www.portfolio.com /views/blogs/dailybrief/)
May 08 2012

Western Union Opens Up a B2B Wallet (http://www.portfolio.com/views/blogs/daily-brief/2012/05/07/western-union-launches-digital-wallet)

1:33pm EDT

VCs Crowded Out?

Fred Wilson, the managing partner of Union Square Ventures, talks to entrepreneurs at Grind in New York City. Image: Teresa Novellino

ill venture capitalists like Fred Wilson, the legendary VC who is managing partner of Union Square Ventures, wind up blogging and advising startups or even becoming an

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5/10/2012 12:18 PM

Vc Fred Wilson Says Crowdfunding A Game Changer For Vcs - Daily Brief - Portfolio.com

http://www.portfolio.com/views/blogs/daily-brief/2012/05/08/vc-fred-wilson-says-crowdfundi...

entrepreneur instead of helping to bankroll startups? Wilson sounds like he’s definitely weighing his options as a result of the passage of the Jumpstart Our Business Startups Act (http://www.portfolio.com/views/blogs/capital
/2012/04/04/investors-warned-about-jobs-act-implications),

which he predicts will be great for entrepreneurs looking to raise cash through crowdfunding platforms
(http://www.portfolio.com/views/blogs/money-hunt/2012/05/08 /study-details-billion-dollar-crowdfunding-platforms) but

problematic for a VC industry that is already struggling to make returns. “The best option is to be an entrepreneur,” Wilson said during a breakfast series hosted by growth consultancy firm co: collective at the new collaborative workspace startup Grind in New York City Tuesday morning. “Venture capital is becoming a bad business.” The JOBS Act, which will let individual investors invest in startups, will result in what he predicts will be $300 billion being funneled toward entrepreneurs after markets begin to crop up by the end of the year. (Wilson’s $300 billion estimate is based on families and individuals investing 1 percent of their assets in crowdfunding—which he thinks will become a popular investment strategy for everyday people.) The return on investment for these rookie investors “will be as bad as in the venture capital world, but that doesn’t mean that people won’t do it,” Wilson said. About $30 billion comes into venture capital firms annually from banks and large institutional investors that have routinely invested 4 percent in VCs each year over the past two decades despite the fact that the VC market has, Wilson says, underperformed as compared to the stock market during that time. Only about half of that money actually ends up amounting

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5/10/2012 12:18 PM

Vc Fred Wilson Says Crowdfunding A Game Changer For Vcs - Daily Brief - Portfolio.com

http://www.portfolio.com/views/blogs/daily-brief/2012/05/08/vc-fred-wilson-says-crowdfundi...

to anything, with the rest vaporized in bad investments. “My concern is that the venture capital industry, as it’s organized today, can only put to work $15 billion intelligently,” Wilson said. “That doesn’t mean that more money can’t be put to work intelligently. It just means that we can’t figure out a way to do it.” Already, a growing number of angel investors have been bringing an additional $1 billion to $2 billion into the VC market in the last few years, and international investors from the Middle East and Russia, especially, have also joined the fray. Since the $300 billion in crowdfunding money will dwarf the amount that venture capitalists put into the system, that will minimize the VC’s role as aggregators of cash and leave them with several other options on how to employ their expertise that would make more sense, Wilson said. If they want to do a total 180-degree turn, they could become entrepreneurs themselves or use their expertise to become bloggers (as Wilson is already doing on the side
(http://www.portfolio.com/views/blogs/money-hunt/2012/03/20 /fred-wilson-tops-heardable-venture-capital-rank )) who write

about the industry. If they continue on as VCs, they have several options, Wilson said. Here's his list: 1. Rather than adopting the “herd instinct” that has VCs all rushing toward the same type of startups—such as cloudcomputing companies—they can choose something that isn’t already saturated and make that a niche. 2. Stop raising hundreds of millions and instead raise tens of millions per company. 3. Start managing their own capital more efficiently and become

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5/10/2012 12:18 PM

Vc Fred Wilson Says Crowdfunding A Game Changer For Vcs - Daily Brief - Portfolio.com

http://www.portfolio.com/views/blogs/daily-brief/2012/05/08/vc-fred-wilson-says-crowdfundi...

angel investors. 4. Manage crowdfunding itself by setting up shop on top of those crowdfunding markets and earning revenues by putting their VC imprimatur on certain companies that they think are fundworthy. The last option, Wilson said, is "we can just retire." But we doubt that will happen.

Teresa Novellino writes for Portfolio.com

Comments

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5/10/2012 12:18 PM

Vc Fred Wilson Says Crowdfunding A Game Changer For Vcs - Daily Brief - Portfolio.com

http://www.portfolio.com/views/blogs/daily-brief/2012/05/08/vc-fred-wilson-says-crowdfundi...

Add a comment...

Aki Balogh · Focusing on our Customers at Calpont Andrew -- I don't believe that the VC model is dying. VCs still add value, esp. for first-time entrepreneurs, by imposing Board-level governance and helping create Bus. Dev opportunities. Since VCs pre-screen investments, there are marketing/branding benefits as well. This goes double for VCs with sector expertise. Some VCs differentiate by directly adding operational value as well. I imagine, over the long term, these VCs will resemble management consulting shops. What is unwarranted, I believe, is a flat ~2% management fee that shouldn't scale linearly as fund sizes increase. Reply · Like · 8 hours ago Andrew West · Managing Partner at AWEquities Americans waste $500 billion a year gambling in casinos and buying lottery tickets. Hard to win at those games. Crowdfunding will enable investors to analyze and decide, unlike gambling. It's risky, but at least they have the opportunity to make choices. VCs are dying a slow death. The old-boy network of exclusivity is vanishing. There are some very good VCs, but as a group they are dinosaurs. The last few years have shown us their struggle with Angels and Incubators, as they tried to mimic those efforts. VCs need deal-flow and that is quickly vanishing. Will crowdfunding beat them? We'll see. But, it will be fun to watch. Perhaps the crowd is smarter than the pedigreed VC. Reply · Like · Yesterday at 3:18pm David Simpson I think that models will morph that find (affiliated or independent) CF sites coming in as LPs and/or co-investing in specific deals. You could only believe the VC firms would go away if they added no value. Ultimately, their technical expertise, investment processes (filtering and valuation), value-add through strategy development and team building as well as guiding towards exit should attract the more rational investors on these platforms. Reply · Like · 21 hours ago Phil Simon · Writer / Speaker / Consultant / Publisher / Polymath at Phil Simon Systems I couldn't agree more. I wrote an Inc. Magazine piece about private funding platforms that overlaps with this a little bit - http://www.inc.com/phil-simon/tech-bubble-why-its-different-this-time.html. Reply · Like · 9 hours ago Maurice Lopes · President at EarlyShares.com Great article, I believe Fred is one of the few VC's that truly understand the benefits Crowdfunding will bring to VC's. Including: Market validation, traction, and stronger/leaner companies. Reply · Like · 23 hours ago

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5/10/2012 12:18 PM

Vc Fred Wilson Says Crowdfunding A Game Changer For Vcs - Daily Brief - Portfolio.com

http://www.portfolio.com/views/blogs/daily-brief/2012/05/08/vc-fred-wilson-says-crowdfundi...

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5/10/2012 12:18 PM

Summary
Fred Wilson, the legendary VC who is managing partner of Union Square Ventures sounds like he’s definitely weighing his options as a result of the passage of the Jumpstart Our Business Startups Act, which he predicts will be great for entrepreneurs looking to raise cash through crowdfunding platforms but problematic for a VC industry that is already struggling to make returns.

Description
About $30 billion comes into venture capital firms annually from banks and large institutional investors that have routinely invested 4 percent in VCs each year over the past two decades despite the fact that the VC market has, Wilson says, underperformed as compared to the stock market during that time.

“My concern is that the venture capital industry, as it’s organized today, can only put to work $15 billion intelligently,” Wilson said. “That doesn’t mean that more money can’t be put to work intelligently. It just means that we can’t figure out a way to do it.”

Tags: Crowdfunding, Crowdsource, Crowdsourcing, VC

Posted by Fiona Mares

May 10, 2012 04:23 am GMT Viewed 759 times

Author: Teresa Novellino Source

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