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Don Tapscott

Don Tapscott

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The Need to Reinvent Venture Capital

Posted: 05/10/11 03:46 PM ET

The good news about Schumpeter's creative destruction is that, thanks to the Internet and digital tools, it has never been easier to start a company. One study found that the availability of open source software, cloud computing, and the rise of virtual office infrastructure has driven the cost of launching an internet venture down from $5,000,000 in 1997, to $500,000 in 2002, to only $50,000 in 2008.

According to Austan Goolsbee, Chairman of the Council of Economic Advisers, in the past 13 years, start-ups created more than 40 million jobs. One study revealed that over the last 30 years nearly all net job creation in the United States occurred in firms less than five years old.

So today's lower start-up costs should mean lots of new companies leading to lots of new jobs. But that's not happening. The traditional venture capital system is choking on the sudden ease with which companies can be founded. It actually makes it harder for start-ups to find the money and also the attention they need. That's because more companies receiving investment means more companies to supervise and more demands on the investor's attention. After all, VCs usually add a lot more than just money. They also provide a supportive environment, make introductions, assist with strategic sales, help recruit top talent, and find customers.

But what happens if you run a $1 billion fund and the companies knocking on your door only want seed funding of $50,000? After all, $1 billion invested $50,000 at a time, would result in 20,000 deals to manage. "The problem," according to a 2009 report by North Venture Partners, "isn't the number of opportunities investors are presented with, but it is rather the lack of an efficient means of filtering the options." Throughput, not supply, argues the report, is placing unnecessary constraints on today's innovation system. "How do investors find, filter and fund the most promising new opportunities in a deep ocean of possibilities? The truth is they can't," the report concludes. So venture funds are trying to move upstream, looking to do seed deals with $40 million plus.

But a handful of new companies are exploring a different option. Sean Wise, a management professor and venture capitalist, leads one of a growing number of outfits determined to prove that a form of community-powered venture capital can both filter the global wealth of opportunities and channel more intellectual horsepower into making each investment successful. His new venture fund, called VenCorps, uses mass collaboration at every stage of the process.

Just as Wikipedia crowdsourced the publication of expert articles, or Threadless works with customers to design t-shirts, VenCorps is leveraging collaboration. He's deploying the power of mass collaboration not just to the process of choosing which start-ups to fund, but to help grow those start-up ventures after the investment is made. "For Venture Capital 2.0 to succeed" says Wise, "there will need to be exponentially more people involved."

The money being invested by VenCorps in small companies comes from their own fund, but the choice of where to invest it belongs to the VenCorps' community. Founders from around the world log on and register their start-up at www.VenCorps.com. There, they can upload a video elevator pitch, share some biographic details and/or post an executive summary. The community at VenCorps (made up of thousands of entrepreneurs, scholars, scientists, angel investors, service providers and government officials) then reviews and ranks each entry using a five-criteria weighted scorecard. During a challenge the top nine start-ups (as determined by the community) go on to the next round, where they can win an investment, typically $50,000. That may not sound like a lot in typical VC-terms, but it's enough to kick-start a small enterprise as some of VenCorps early successes have demonstrated.

Post investment, the community continues to help the startup. The theory is that "many hands, make light work" or as Kevin Kimberlin, Chair of the private equity firm behind VenCorps, puts it: "VenCorps is 21st century barn raising. Instead of relying on three experts to put in 1,000 hours each, you rely on 1,000 people putting in three hours each." The VenCorps platform uses the web to offer creative new ways to link up start-ups to get them access to not just cash but also to support and prominence. VenCorps uses social networking to give start-ups the keys to succeed, faster, cheaper, and more equitably.

While VenCorps is unlikely to challenge major VC firms anytime soon, the company is giving a chance for many more promising ideas to reach the stage where larger VC investment may be warranted.

Crowdsourcing venture capital is also a means for the government to assist with job creation. The Boston Innovation District is a good example. The District is a large parcel of the South Boston waterfront undergoing redevelopment, and the city is looking to attract start-ups. "We are creating a hub of knowledge, creativity and inspiration -- an Innovation District where new ideas, new businesses and more jobs will come to life," says Mayor Thomas Menino.

So Boston teamed up with VenCorps to run the Welcome Home Challenge. Companies used the VenCorps site to promote their business or business plan. Entrepreneurs, innovators, stakeholders, the general public, funders and organizations were then encouraged to vote on these submissions, supporting those they think are a best fit for the Innovation District. At its core the VenCorps concept is to supplement some of a start-up's cash capital requirements with community "enthusiasm capital."

VenCorps gives entrepreneurs the ability to engage the community to help launch and develop ideas into start-ups, then into successful businesses and hire people. In the end, this feedback proved as valuable as the cash injection made by VenCorps according to Bill Starr from MyLifeList who won the Boston Challenge. "I am really excited by the opportunity to have VenCorps as a Seed Investor. We came for the cash, but stayed for the community."

 

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