BackWords: An Experiment in Internet Funding?

Hey Vincent,

I did in fact get through to one of the priniciples in this venture. It appears they're re-thinking their fund-raising concept.

Apparently there's been a backlash against the effort by some who liken it to "pan-handling." In all fairness to the Backwords folks, though, how strange is asking for tiny bits of funding from a diffuse group of people compared to the more popular idea of seeking a ton of money from one investor (i.e. venture capitalism)? I can't define a clear difference between the two ideas.

I think it's an interesting concept. It's almost like an IPO that's open to the public-at-large. They could issue a penny-stock cert. to all investors up to the amount they want to raise and then see what happens. I'd also use a popular vote system to make important company decisions. I am not sure what the legality of this would be as far as the SEC is concerned (technically it'd still be a privately held corporation, so maybe no SEC implications). Anyway, I'm not an expert on investments, start-ups, etc.., but just sounds like a neat idea.

The difference in asking many people for a little bit of money over one person for a lot of money is effort. It's takes very little effort to ask a lot of people for a dollar each, whereas the effort required to ask a VC is much greater. Not only do you need a sound business plan and financial forecasts with a VC, you need to actually act on that plan and provide some sort of return (or at least that's how I have visioned the process). With many people invested at only a dollar or two, there's no requirement to follow any plan or provide any return on investment. You can simply skip town and blow the cash on the tables.

gatorace: I definitely see your point. I'm just not sure I agree with it. Having been in the venture capital sector I figure I'm as qualified as anyone to respond, but in the end its all just opinion right?

If we are talking about actually trying to "succeed" in raising capital and building a business then I would say it would be much harder to ask a lot of people for a little bit of money than a small amount of people for a lot.

First, I think people have grandiose ideas about what the VC world is like. The biggest job in Venture Capitalism? Sorting through all of the crap that is submitted to you. And I do mean crap. I've seen business plans that an 8th grader could have written better. Trust me, there isn't always a lot of 'work' going into these business plans. VC's want to 'buy' basically two things. A good, marketable idea, and a great management team. The idea doesn't have to be great, but if you have a great management team they can make it pay off. I've watched large multi-million dollar deals closed in the course of minutes. And small-time deals take months and months of due diligence work.

Small time investors like those that would contribute to the kind of scheme in the article are spending *their* money. VC's either rarely do that, or there is enough money in play that it has the same effect as not 'feeling real'. There isn't the same sense of risk being felt by the VC as there is the small time individual investor. The only way to eliminate that of course is to get the amount of money in question so low that the investor considers it expendable. But there are two problems with that, one is that if it's that small of an amount the number of people required to invest is so massive that it isn't likely to happen. And second, if the amount is that low then the investor wouldn't have enough upside potential to every make it worth their while, even if its considered expendable.

The effort to convince hundreds of thousands of people to part with their own money sounds easy but is no small undertaking. Just ask anyone who has a great product to sell, at a reasonable price, that we all could use. They have an actual, tangible, product to give you in return for your money and yet every day thousands of would-be entrepreneurs fail to attract the number of people that we are referring to in this article. Marketing, websites, search engine optimization, media coverage, press releases, working the phones, etc, etc, etc. It is a great deal of work. And at the volume of people we are discussing would either take a mass upheaval on a platform like the internet to take hold, or you'd need an army of people out trying to raise money for you. And from where I sit, that's a lot more work than finessing a business plan and your pitch to try and raise money from a few VC's.

By the way, I don't recall the name of it offhand but if you google for it I'm sure you'll find it. There have actually been a few attempts to create a marketplace for this type of investment where you can take your idea to the marketplace (or your wallet) to attract a large volume of small angel investors.

Cheers,

-Matt