Tag Archives: Venture Capital

Crowdfunding in People Over Projects

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Last Friday, David Girouard posted an opinion piece on Wired discussing why he sees the future of crowdfunding going towards investing in people over projects. Girouard is the co-founder and CEO of Upstart, a company that allows investors to back both college grads and up-and-coming grads for a portion of the money they make in the next ten years. So naturally, this idea is one he is very passionate about.

The main argument of the article describes the difficulty in predicting the outcome of a start-up, and if a VC firm struggles with its predictions, how can someone with no prior investing experience hope to get a good return? The answer, according to Girouard, is investing in people.

While the idea of investing in people is a fascinating one (Read: The Man Who Sold His Fate to Investors at $1 a Share), the limitations of what Upstart offers in investment seem to drag the fledgling philosophy down.

I love the idea of putting money into a person over a business. It gives your investment more reach. If one project fails, the next could gain traction and vice versa. However, it could be argued that an individual has much more variables to consider than a standalone project.

If you invest in a project, you invest in a team that has assembled itself because they think their strengths and weaknesses accent one another in a positive way. With only investing in a single person, you get all their strengths, but also all their weaknesses — they don’t get distributed into a collaborative group.

This may work for some individuals, such as Steve Jobs, Bill Gates and even Mark Zuckerberg, but the majority of startups are formed by teams and collaboration from the get-go.

The other problem is the way Upstart determines how much income an individual will eventually make. The article describes the process like this:

“It’s not unlike the logic used by big companies or universities faced with countless candidates, by recruiting firms and talent agents, and others. By using data and algorithms — in this case, a sophisticated regression model that considers variables like school, area of study, standardized test scores, internships, job offers — we can statistically predict a person’s future income.”

To me, the idea of entrepreneurship and what makes an entrepreneur is to cross over these statistics and create your own path to success. For example, what would Bill Gates’ estimated income be when he dropped out of college? Would Upstart’s process have truly predicted the success of Microsoft?

To compare entrepreneurship logic with that of logic used by big companies is to miss the point entirely. The algorithm shouldn’t rely on standard forms of success, because no successful startup has followed the exact same path. And likewise, no individual pursuing entrepreneurship finds success in the same way.

Crowdfunding is Growing, but has Side Effects

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Today, analyst firm Massolution reported that crowdfunding in 2012 nearly doubled since 2011, raising funds upwards of $2.66 billion in 2012 as opposed to $1.47 billion in 2011. Analysts suggest that crowdfunding in 2013 could surpass $5 billion if the trend continues on its current trajectory.

While crowdfunding has become a major trend in early investment, it is important to remember areas where it falls short. Mainly, the idea of mentorship goes out the window. While this idea may seem a stretch, many early stage, first time entrepreneurs gather an assortment of skills through experienced investors.

Without this experience and mentorship, it can take longer to fully develop a product as well as a plan to get it out to the public. This takes away from efficiency  and could easily affect your reception and traction if the product takes too long to ship, and it can also take away form your products market placement.

That being said, if you are an experienced founder, crowdfunding could benefit you immensely. You already possess the skills needed to turn a product around and meet goals without the need for mentorship. In fact, you are most likely in the position to mentor, and have already had experience garnering the necessary funds for pre-Series A investment.

An important fact to remember is crowdfunding is a young idea to early stage investment. If it were a new drug to help concentration, the long term effects would not yet be known and the success stories could begin to have major side effects in the next 30 years.

Whether you go with crowdfunding, VC or bootstrapping it is important to measure the positives and negatives of either situation. Otherwise, your great idea could be squandered before it starts.

Enterprise IT in the Cloud Decade

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This morning as I read the news and settled into another work week I was greeted with two articles from GigaOM that caught my attention. One discussing the ‘golden age’ of enterprise IT, and another discussing how IT departments must adapt to the process instead of being left behind by new trends (a theory coined ITaaS, or IT-as-a-Service).

In all, the first article describes that VC in big data/enterprise solutions is jumping and analysts predict it will stay that way for upwards of 7 years. They link multiple trends that brought on this trend such as BYOD, cloud computing and the growth of data sets. With all of these innovations, it leads to disruption which entrepreneurs can then make more efficient, thus garnering a considerable amount of funding for early stage investment.

And with this trove of innovation comes companies that would like to be at the helm of it, which is why you see accelerators such as Microsoft Accelerator for Windows Azure, Citrix Startup Accelerator and many more. And yet, with all the funding and moves happening within the industry  IT professionals are still hearing more and more about how their jobs are being outsourced.

And so we are led to the second article, which describes ways in which IT departments can still be effective. And while Bart Copeland, the author of the piece, describes the theory as ITaaS, it seems awfully familiar to a theory we all know and love: consumerization.

Consumerization is the main argument behind BYOD, and describes that information technology that first shows up in the consumer market then trickles into a work environment, which IT departments then have to manage.

In all, IT is shifting more towards a service industry, this is true. But while it is so easy to find an SaaS package to help your department become more effective, whether it’s accounting, communications or anywhere, companies still need professionals to be able to vet which applications make the most sense in their work environment. Without those professionals, environments can become clogged and take away any efficiency gains.

So while the IT department is being changed due to emerging technology trends, it is now necessarily in a bad way. Instead, it is shifting towards a more service-based industry.

2013 Investment and MN Health IT Accelerators

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Along with all the 2013 listicles hypothesizing what will happen in 2013 and how 2012 differed from 2011 we were greeted with articles warming our hearts on investment, and how 2012 was a big year for venture capital.

The Upstart Business Journal reported that from 2011 to 2012, VC funding grew nationally by 10 percent. From $18.7 billion to $20.6 billion. However, while the amount of investment went up, there were fewer venture-backed deals.

This typically shows that either excitement in the market grew, which could arguably be tied to Facebook’s pre-IPO months, or that more promising companies opened themselves up for funding in 2012.

Since Facebook went public on May 18, 2012, it has been a roller coaster ride, with most analysts calling it the worst IPO in market history. Starting off at $38.23 a share, prices quickly fell, with the lowest point coming in at $17.73 on September 4, 2012.

It’s hard to believe that Facebook, the most anticipated IPO in recent history, would have such dismal numbers, but it came from the lack of evidence they presented to turning a profit. Where were they going to make the money?

With this in mind, it’s hard to imagine 2012 was the best year for IPOs since 2000. Facebook lead the new wave of companies going public, and while they opened today at around $31, the beginning of the roller coaster ride was severely undervalued.

It was not just a year for VC and IPOs, however. Amazon chalked in a record setting year with its highest priced shares. In the last 12 months, Amazon has seen its shares rise nearly 50 percent. They also recorded their best holiday season to date.

So after all this data, and the ability to see that the market is doing pretty well, what does this have to do with Minnesota?

According to the BioEnterprise Midwest Healthcare Venture Investment Report, investment in Health IT/Healthcare companies in Minnesota was down 23 percent. In 2011, 24 companies received $223.3 million. Looking at 2012, 17 companies received $164.7 million. And here is the kicker, Minnesota received the second highest amount of money. Trailing behind Ohio, which raised a whopping $291.7 million.

So why the gap? And why, after a year of solid national investment, are we down 23 percent in healthcare companies when it is a hot market? The answer may lie in accelerators.

Minnesota is surprisingly lacking in the number of health accelerators. President Kaler of the University of Minnesota has started a new initiative. Over the course of 10 years, Kaler is offering $20 million in investment to promising University startups. However, this funding is only for U of M students.

Another promising peak at an accelerator is Inceptis LLC., which will specialize in Class II medical devices, which Minnesota has been a leading provider in. But again, having such a tight focus doesn’t necessarily allow for broad innovation.

If Minnesota wants to compete with the likes of Ohio, or even on a national scale with its promising healthcare companies, we need to have more accelerators both keeping the talent here and providing incentive.

Now, it seems, is a ripe time to start the debate. Investment is hot, Health IT is blossoming, and Minnesota has the means to secure a leading position in the field. The only real question is who will step up to the plate?