This post was originally published here.
at VCs, and after managing the European
American Angel Club for 2 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.
Here is the story:
I have seen are roughly 3 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.
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)
So 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...