Venture Capital Is Facing Real Competition At Last

On Monday, the SEC’s new startup investing rules went into effect. Startups can now raise $5 million annually through equity crowdfunding. That’s a 5x increase from the previous limit.

I really can’t overstate how important this change is. It’s a monumental moment for startups — and everyday investors like you and me. Suddenly, equity crowdfunding is a viable funding option for far more startups and small businesses. The new limit is enough to fund a large seed round or a moderately-sized Series A.

Word is spreading among founder networks that “equity crowdfunding” now deserves serious consideration. It’s now possible to raise $5M from 10,000 investors in $500 chunks. Think about the potential benefits of having a small army of investors supporting an early-stage company.

For startups that sell consumer products, it’s a vast group of potential early customers (and a way to offer current customers a stake in the business). This battalion of investors can help get the word out about the company’s product by sharing on social media and referring friends. And with up to 10,000 investors, the group is bound to have a diverse set of skills that can help in all sorts of ways — from marketers to writers, lawyers, designers, developers, and sales people. 

For many startups, these funding rounds will increasingly serve not just as a funding mechanism, but also as a marketing one. Whether the product targets consumers or businesses, the potential benefits of conducting a public funding round are tremendous. If the campaign catches on, it’s likely that hundreds of thousands of people will learn about the company and its offerings.

First Real Competition For VCs

One of the more interesting aspects of this new paradigm is that for the first time ever, early-stage venture capitalists have real competition. They’re no longer the only viable option for early funding rounds.

Don’t get me wrong, there will always be a role for talented venture capital firms. They back many of the most successful businesses in the world — and will continue to do so. But the business model just doesn’t scale well. There’s only so many deals each partner and firm can back. 

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