After looking at VCs, and after managing the European American Angel Club
for two years now, I have come to the conclusion that entrepreneurs are
not really being served properly when it comes to seed funding. And I
would like therefore to propose the concept of an Entrepreneur Commons to help with the issue.
I have seen are roughly three types of angels:
- The
super-angel, who has enough money to be a one-man-show VC playing with
his own money (and maybe money from a few friends). Either he is known
by the VC community, and he is treated well by them because he can
source good deals for the later-stage rounds, or he has enough money
within his ecosystem that he can help entrepreneurs all the way through. - The
social type, who has money and like toying with the idea that he could
invest and may do so one day. He likes attending meetings and talking
about it, but the reality is that he never really invests in anything. - And then you have everybody else in between these two types.
These last group of angels is facing a lot of issues with the model as it is today:
- Angels
their put money down and they have no clue when it will come back (if
ever). Typical time before a cash event is 7 to 9 years if you believe
angels who have done it for a while - When investing
in early stage, they have no real data to figure out a valuation, so
any equity deal is based on arbitrary valuations where somebody is
getting a bad deal on one side (angel) or the other (entrepreneur) - If
the business requires additional funding, Angels are being squeezed of
the deals by VCs, who impose liquidation-preference clause - And
finally because you are just an Angel after all and not a fund, you are
limited in your resources and cannot really spread yourself into a
number of deals that is statistically relevant.
in the end, they are playing the lottery, and they know it. And because
they are playing the lottery, they want the reward to be as big as
possible if they win, so they tend to shoot for companies with a
potential for return of at least 10x the investment.
From the entrepreneur side, this leaves out of the system a whole lot
of very good startups with very promising businesses but not “hot”
enough. This is even more critical these days when you see an emergence
of “social entrepreneurs” who are interested in making money, but whose
focus (and measure of success) is also to help the community one way or
another. They are not really non-profit, so most of the time they do
not qualify for grants, but they are not the 10x type either. Meanwhile
they clearly deserve help.
The way I see out of this situation is the Entrepreneur Commons:
A
not-for-profit social network of entrepreneurs providing financing for
early-stage company through debt guaranteed by a mutual guarantee fund.
The financial risk is mitigated by the mutual guarantee fund. The risk
on the “management” side is mitigated by the social network: loans are
by invitation only, so you will have to be approved by your peers to
get in. And the typical scalability issue faced by general partners in
a VC fund (which causes the famous “funding gap”) is also resolved by
the social network: the size of loans and the number of entrepreneurs
involved is no longer a problem, and if anything it helps stabilize the
results of the group as a whole.
The project is starting to get some traction, and we have been getting a lot of positive feedback. The recent post from my friend Jessica is a good example of the reactions I get. The
goal is now to confirm the blueprint for this model, so that it can be
replicated anywhere. We have started looking for funds so that we can
make loans soon.
Stay tuned.
