How do early-stage startup companies get funded? Where do they go to raise capital? For companies raising less than $1m, incubator programs, Angel investors, and friends and family are the most common. Each of these types of investment have a similar structure: a person or group buys equity in the company with the intention of making a return on that investment when the company is sold at some point in the future. In each of these cases, the number of people investing in an individual company is relatively small. Incubator programs like TechStars and Y-combinator raise money from a variety of sources and do so for each cohort of companies coming through the programs. Each cohort may have a handful of investors, their investment capital is distributed over the handful of companies in the cohort.
The scale of investment in each of these types of deals is relatively the same. Seed stage investing involves relatively large amounts of money being brought to the table by either one or a handful of investors who share in the proceeds from a future sale of the company. Let’s call this the 1x$100,000 model where investors are investing on the order of $100,000 each in seed round financing.
What happens if we move the zeros around in this model? 100x$1000, or 1000x$100 for example? How does the deal change? First of all, $100 or $1000 is a much more accessible sum of money for most people, potential investors or not. For entrepreneurs, the prospect of 100 or 1000 investors may not be a good one. 1000 people expecting your company to grow and produce a return, 1000 shareholders who have say in the decisions the company makes. Having 1000 shareholders in a company puts expensive limitations on how the company can do business from a corporate law perspective.
What if the 1000 investors are separated from decision making at the company? Assuming the administrative overhead of having 1000 investors can be mitigated, what other upside potential exists for companies and investors at this scale? Having 1000 investors means finding beta users is not a problem and networking to find people with specific types of experience is easy. This networking can go in many directions: the entrepreneur can get introductions to potential employees, the entrepreneur can also meet potential advisors, partners, even future investors. Small startup companies following metrics driven approaches to building their businesses need some scale in their user base to be able to test hypothesis about products being built and reach useful conclusions.
Successful, thriving companies in a community can improve the landscape of that community for everyone. One successful company can produce good exits for its founders, who potentially become angel investors in the future. The business model created and proven by a success can inspire similar companies to pop up, and who best to make those companies than people who were involved in the initial success? Success also attracts interest from outside of a given community, further increasing opportunities for the community. In short, investment in building successful companies in a given area is what makes future successes possible in that area. The lowered barrier to investing that a 1000x$100 model offers could make it feasible to fund many more seed-stage startups in communities that are not known for having good investment climates. In a best case scenario, 1000 investors in a company would provide an instant support network for seed-stage companies, a network rivaling that of the best connected companies in the best investment climates.
0 Responses
Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.