Fund Raising 2.0

It occurs to me that in this whole debate over angels and VCs, there is an important third option that is missing from the table and I have been referring to it colloquially as "Social Network Offering", or SNO.

The idea is that instead of raising money directly from an angel investor or a professional venture capitalist, you raise money through a network of friends, acquaintances and contacts in the industry.

The startup to-be creates a prospectus with some basic information like the business they are in, the execution plan, and the capital requirements to go from startup to profitability, acquisition or another exit strategy.

So far, that is not any different than any other financing option available for a startup. The difference is how the share holders are invited into this process. Instead of being a closed door event where the angel or the vc sets the terms, the founders of the company set the terms for the investment as well as the initial round of capital that they are trying to raise and offer this to the social network.

The Social Network Offering round would be setup through an escrow system that would give different investors a chance to participate in the first round of finacing, and if enough startup capital is raised in this phase, the money is given to the company and shares are distributed to the investors. If the startup fails to raise enough capital, the money is returned to the investors.

Social Network Offerings are transparent in nature. They would not work well if you are trying to create something in secret, something that nobody has ever heard of, since you would need a level of secrecy for this to work. But it would work great for business built around open-core, or business where the strategy is to do it better than existing offerings.

Balance

If you have a social network of friends that can help you raise this kind of cash, the advantages are:

  • Your social network knows you better than a new VC firm or an angel.
  • Individuals that have historically not had a channel to invest in startups, get a chance to participate. This is fairly unique.
  • Easier to keep the company vision intact.

There are also some downsides to go with Social Funding: VCs can help you get a seasoned executive team in place, they assist you by filling the gaps during the early stages of the company, they let you tap into their network of companies and resources and they will not hesitate to course-correct any ideological problems that do not necessarily blend well with becoming profitable.

What is your take?

If you had a chance to invest on a high-tech startup, how much of your own money would you be willing to put up-front for something like this?

Fill my survey here.

Update: On twitter, @eoinh pointed out that one company already did something like this. They used Linked-In to raise 350,000 dollars through their contacts, and found matching funds from the government raising the total to 700,000.

Posted on 17 Nov 2010 by Miguel de Icaza
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