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Startup Funding Has Finally Become About Merit

Startup Funding Has Finally Become About Merit
Photo by Annie Spratt on Unsplash

Entrepreneurship has always been in my DNA. Growing up on a farm in England, I knew I would need to move to America to fulfil my need to succeed. Had I stayed, there is no way I would have been able to raise capital for an ambitious startup. So I moved to the US, and after my first startup in LA, I went to Silicon Valley, as was required at the time. Because of my move, my career enabled me to help build companies that continue to enjoy success today.

The old economy had a different set of rules. Raising startup capital has historically been easier for those of us live in the hubs of venture capital like Silicon Valley, Boston, and New York. Unfortunately, the majority of smart and creative people in the U.S. live elsewhere, and are unable or unwilling to relocate in order to ease their capital raising concerns. Fortunately, raising money has become much easier with the changing culture of venture capital. Geographic considerations are becoming less important in the new economy.

In the U.S. we now enjoy a new world of entrepreneurship opportunities brought about by the Internet. In particular, democratic access to capital is becoming increasingly real, enabling the best minds to build great technologies and innovations, whoever they are and wherever they happen to be. The “you can too” culture of entrepreneurship has taken root and it’s changing the rules of the game.

With the advent of donation crowdfunding sites such as Kickstarter, things got a lot better for the few entrepreneurs whose products found a fit with donation funding (mostly gadgets that cost less than $150). Since then, funding has taken an even bigger step for the better. In September 2013, equity crowdfunding websites were allowed for the first time to raise investment capital for startups from wealthy “accredited” investors. By my calculations, this resulted in $1.6 billion of capital being raised by these “Title II” platforms in their first full year during 2014. That’s pretty impressive considering they had just started from zero.

In November 2015, the SEC defined the rules that allow U.S. startups to raise up to $1 million from “mainstreet” (non-accredited) investors. Those rules will come into effect in May 2016, and will be called Title III. This is a big step that compliments the Title II style nicely, especially as the startup landscape now includes the non-wealthy investors who have been barred from investing in private companies before now.

In a historic move that made 2015 a banner year, the SEC introduced another whopper in June. Regulation A+ (Title 4) allows main-street investors to invest up to $50 million in mid-sized companies. Now we have Title III covering the seed round of startups up to $1 million, and Title II spans up to about $4 million for startups that are bigger or a little further along. An even bigger company would be covered under RegA+, which covers mid sized companies that need to raise $4 to $50 million per company per year. Under these rules, they are able to make a simple Public Offering without the complexities and at a fraction of the expense of a traditional IPO. Simply put, entrepreneurs have never had it so good!

In my opinion, the greatest aspect of all these new fundraising alternatives is that the companies raising the money succeed on merit, on how great their idea is, how well they communicate it, and how well their management team engages with the investor community. Issues like geographic location, age, gender or ethnicity of the CEO all fall away into irrelevance (or become a plus) which is as it should be.

Now capital raising is rapidly becoming a meritocracy. The best idea, business model and founder/manager wins. Not only is this fair and right, it will generate faster GDP growth and employment for all in the years to come. More prosperity and more opportunities for a self-directed future for all. What’s not to love about that? In all, there has never been a better time to become a entrepreneur.

Photo by Rocío Lara

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