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Fred Wilson on Equity Crowdfunding


Fred Wilson predicts Equity Crowdfunding will be great for entrepreneurs looking to raise cash.

Fred Wilson is a legendary voice in the Venture Capital community. As a partner at Union Square Ventures, he has backed some of the most iconic startups including Twitter, Tumblr and Foursquare.

He recently spoke out about crowdfunding and said that he predicts that crowdfunding platforms will bring in 10 times that of what VCs bring in annually, which means jobs like his are about to change.

Read the full article here on the website for the Grind Co-working space in New York.

VCs Crowded Out?

Will 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 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, 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.

“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 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) 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 cloud-computing 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 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.


By Teresa Novellino Upstart Business Journal Entrepreneurs & Enterprises Editor

This post was written by SeedInvest on May 15, 2012

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