I have always been fascinated by two different but closely related ideas: the idea of crowd funding, i.e., raising capital investment from the crowd at the seed stage, and the idea of a private stock market for startup companies, i.e., enabling early shareholders to exit by selling their shares before an IPO event and enabling the crowd to privately invest and exchange stocks of startup companies before going public.
There are few attempts here and there to do both, but they never really clicked for technology or web startups!
Personally I participated and won in MIT business plan competition 2009 by a similar idea, a private stock exchange for blogs and media websites! But I couldn’t implement it. Technically everything was viable, I could have built the trading platform, provided web analytics via Google or Woopra, tracked online revenues, provided automated auditing reports, and provided professional financial reports by the best experts, but still I couldn’t implement it!!
There are huge legal challenges and restrictions that limit this. The main barrier faced by everyone is that, by law, such a private investment fundraising or stock exchange will only be allowed for qualified or accredited investors who are only a minority of the “Crowds”!
From the investment authorities’ point of view, it’s the easiness of scam in such an unregulated and unmonitored process that is the main reason why such activities were restricted from the first place.
From the entrepreneurs’ point of view, crowdfunding could be a great opportunity to start-up without the hassle of the VC investment process. But his could be good and bad at the same time for very early stage startups! Instead of having hundreds of anonymous investors, one or two angel investors who can add real value to the startup would be much better. At the same time, having hundreds of early stage investors might be a bless, because they are considered as early clients, or better, if they all start promoting the company to their own networks they would be considered as an army of marketers!
From the crowd’s point of view, this is a great opportunity to invest early in a startup and make huge returns later on. But they need to protect themselves from scam, and they will need to exit at some point.
From the investors’ point of view, having hundreds of early stage individual investors in a technology company will create a problem in the deal terms, so they would be hesitant to invest.
In the next post, I provide few international examples of entrepreneurs who have successfully raised funds from the crowd, and I explain how they did it
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