Not every company is a perfect fit for conventional venture capital investment. In a recent blog post, Fred Wilson lamented the use of the somewhat degoratory term “Lifestyle Businesses” and instead suggested splitting companies up into three buckets:
- Lifestyle – Too small for VC, but will generate enough annual cashflow to be a great business to own and operate
- Indie – Might be large enough to justify and provide a return on a VC investment, but the desire to retain control and remain independent makes VC untenable for the entrepreneur
- VC Fundable – Large enough to justify and provide a return on a VC investment and the founder is willing to exit at some point and provide a capital gain to the investors
What struck me about this breakdown is that these “Indie” companies could be a great match for using the new Regulation A+ which allows companies to raise up to $50M from the general public in a mini-IPO style offering.
By crowdfunding capital from the general public instead of venture capitalists, these “Indie” companies can avoid many of the strings that come with venture capital, including:
- Board seats or board control to VC
- Protective provisions requiring VC consent to take certain actions
- Pressure to sell or IPO to provide a liquidity event
- Being fired as CEO of a company you founded
Because shares issued in a Reg A+ offering are unrestricted, tradable shares, investors may be able to obtain liquidity without an acquisition or an IPO through Venture Exchanges (caveat: much needs to happen before this becomes a reality).
Reg A+ also allows for founders and early investors to sell some of their shares as part of the offering. The Reg A+ round can provide a chance to realize some liquidity for investors and employees who have invested in an “Indie” company early on in its life.
The big catch, of course, is that Reg A+ deals are registered with the SEC and therefore will require a lengthy and rigorous SEC filing and approval process.
Founders of “Indie” businesses will have to determine if Reg A+ is appropriate for their particular company. What is clear, however, is that having another fundraising option in the toolkit is good news for companies with an independent mindset.
This post was written by James Han on June 1, 2015