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