The State of Start-Up Funding: An American Perspective

Funding in the U.S. these days, particularly in the seed round, has become rather difficult. The vast majority of investors won’t even consider a start-up for funding, unless it has achieved some form of significant “traction” in the form of early stage customers and revenues. So while many investors claim that they offer “seed” funding, the truth of the matter is that seed funding has all but disappeared in the U.S.

Achieve Traction

So the reality in 2015 is that start-ups essentially have to achieve traction using their own capital and that of “friends & family” in order to make their businesses fundable in today’s environment. Depending on the type of business involved, that may or may not be possible. I have one potential client who I’ve been talking to recently, who needs about US$2 million to get the first of a chain of medical centres set up and running. He has a great concept and has had countless investors tell him they will invest AFTER he gets his first centre up and running. But none on the front end. So after having spent the princely sum of US$500,000 in personal funds to push the idea as far as he could, he is essentially tapped out, and stuck in a sort of limbo, where he can’t move forward until he is able to get the additional capital he needs.

In essence, this seed funding gap has put the brakes on small business development. Without seed funding, a startup might take 2-3 years to accomplish what it could in six months with seed capital. A lot of this investor risk aversion stems from the Great Recession of 2008. Investors are simply much more risk averse than they were a decade ago, after absorbing enormous losses in real estate and in the stock markets. As both of these economic drivers have been in recovery for some time, it would seem that this risk aversion remains.

Equity Crowdfunding?

What’s interesting to note about the U.S. market is the rise of the Crowdfunding industry. Donation-based crowdfunding has been around for years, and continues to grow with success stories like the Pebble Watch and the Coolest Cooler paving the way for growth. But perhaps more promising is the emergence of equity-based crowdfunding, which passed into law in the United States more than three years ago. This may well be the answer to the seed funding gap in the U.S.

There is, however, an issue. The U.S. Securities & Exchange Commission, which is tasked with setting the rules and regulations for the industry, has been dragging its feet in implementing the regulations that would allow full scale equity crowdfunding. To date, they have enacted regulations for Titles I, II, and most recently title IV, but by and large, these regulations only serve wealthy investors and larger companies with the capital needed to wade through the bureaucracy and paperwork. The biggest change so far, has been the permission for “general solicitation” that allows equity crowdfunding companies to actually advertise their offering, something that hasn’t been allowed since the 1920’s in the U.S.

The real, difference-maker, however, is going to be Title III of the Jobs Act, which will allow non-accredited investors (the vast majority of the population) to invest in startups. This is where the rubber will meet the road in terms of a major shift in the capital market. And it will likely only take one major success story to fuel a major boom in crowdfunding equity investments in the U.S. market.

Allegedly, the SEC is going to release the rules from Title III in late 2015, although this proverbial can has been kicked down the road a few times already. Time will tell if an truly open equity crowdfunding, such as that of Crowdcube in the UK, or ASSOB in Australia, will really happen in the U.S., and even if it does, if the rules the SEC implements will be too prohibitive for start-ups.

Until then, start-ups will continue to scratch and claw on a shoestring, unless investors start to take on more risk and open up their wallets to provide more seed capital.

By Todd Smith, CEO

Blue Horizon Venture Consulting

Blue Horizon Venture Consulting is expert in business plan writing, financial modelling, and investor pitches, and has helped hundreds of companies raise more than US$250 million to date.

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