Yesterday, the Securities and Exchange Commission (SEC) ruled that startups can begin publically advertising their securities. This new ruling affects investors, journalists and startups alike. While journalists will see their already saturated inboxes take on a whole new meaning of full, startups will have a harder time being noticed amidst all of the noise. What does this mean for investors? While the SEC still needs to rule on whether or not non-accredited investors can legally invest in private companies (and that will open an entirely different can of snakes), this new ruling only affects accredited investors for now.
Our take on this —
Discovery = More Work
Forget that startups will have to invest more energy in obtaining press, energy that could be used toward working on the operating part of the business. There is going to be a tidal wave of startup fundraising press releases. While journalists are already beginning to bolster their inboxes, investors should begin preparing as well. As soon as startups find out your identity as an investor, it will be the decade of telemarketing all over again. Spam-o-Matic at its finest! Not only will you have an absurd amount of startup pitch decks, but how will you determine the diamonds in the rough? With so much noise, it will be difficult to tell the frogs from the princes. I think I will need a new email address — firstname.lastname@example.org Better yet, some sort of inbox plugin to automatically scan through the plans and flush those that make one or more of these Common-but-Fatal Errors.
Cap Tables and “Activists”
Cap tables in early-stage companies are frequently ugly, but they are about to look a whole lot uglier. While it may not be your job to manage the cap table, a cap table that is longer than a resume is ultimately not fun to work with. The number one issue of a lengthy cap table you face as an investor is that you are unlikely to know the other shareholders and their decision making habits. While many of the investors will likely be itty-bitty shareholders who aren’t actually paying much attention to the company – essentially playing the numbers game and hoping for a reasonable exit or putting money into their brother-in-law’s new venture just to keep their wife or husband happy – and others will be truly supportive of the company, all it takes are a few trouble-maker shareholders to ruin the party for everyone. And its a safe bet that there will be opportunists who will buy into a deal, become troublesome for management and/or the other shareholders, and then offer to sell their shares back for a “small” (500%) profit. Management and the other shareholders will be only too glad to pay off just to get rid of this “bad money” and let management focus on the company.
Poisoning the Well
This is a problem for the company trying to raise cash. One of the biggest advantages of pitching your venture to a few investors at a time, especially for first-time entrepreneurs, is that you get to screw up incrementally i.e. you can polish your pitch based upon the feedback you receive. On the other hand, when you go straight to broadcast, and fail to tell your story well, EVERYONE will have heard you and no one will listen when you finally do get your pitch refined. That’s why God invented focus groups. Getting feedback from small groups and refining your product is not foolproof (Ref: Groupon Super Bowl) but it is a lot more likely to get results than opening simultaneously in theaters across the country (Google “Disney Lone Ranger”). Entrepreneurs have a tough-enough time raising capital as it is. There will be plenty of naysayers. They shouldn’t poison the well themselves.
Good Intentions, etc.
The JOBS Act was created with the intention of helping new business, growing existing ones and creating jobs. Noble goals. We fear, however, that unthinking folks may do more harm than good to themselves and other as this volatile and noisy process evolves.
What do you think? Are there ANY winners?
-Steve Hogan, Managing Partner, Tech-Rx