In a move that could potentially pave the way for more European venture funds to explore crowdfunding, London-based early-stage venture firm Passion Capital has announced plans to crowdfund the final stage of its third and latest vehicle. This development marks an apparent first in Europe, where high net worth individuals will have the opportunity to invest in the vehicle, with a minimum investment threshold of around $500,000.
Inspiration from the US
Firm founder Eileen Burbidge attributes the inspiration for this move to developments observed in the US market. Specifically, she cites AngelList’s rolling fund program and an imminent change in crowdfunding regulation, Reg CF, which is set to increase the maximum amount that can be raised through a crowdfunding campaign from $1.07 million to $5 million over any 12-month period – a nearly five-fold increase.
Regulatory Landscape
The impending change in Reg CF regulations has significant implications for the venture capital industry. Currently, funds are limited by the number of individual investors they can have, with a maximum of 2,000 non-accredited investors allowed per offering. The new regulation will allow funds to have up to 5 million accredited and non-accredited investors, thereby increasing the overall amount that can be raised through crowdfunding campaigns.
Challenges Ahead
While this development presents an exciting opportunity for European venture firms, there are several challenges that need to be addressed before crowdfunding becomes a viable fundraising path. Fund formation attorneys and administrators have expressed concerns about the benefits of having investors who can provide contacts and expertise to portfolio companies.
Expert Insights
One fund formation attorney noted that VCs value the relationships they build with their limited partners, which can provide valuable insights into technology trends and implementation strategies. This highlights the importance of traditional venture capital relationships in facilitating investments.
A less obvious concern is tied to complications surrounding a firm’s internal rate of return (IRR). VCs prefer not to have money sitting idle on their balance sheet; instead, they like to call down capital as needed, which gives them more time to shepherd an investment into success.
Administrative Burden
Another practical consideration is the potential administrative burden that comes with having a crowdfunded component. As attorney Mike Sullivan of Orrick notes, it could involve potentially hundreds of equity owners for a relatively small amount of money.
SPACs and the Venture Capital Landscape
The recent rise in special purpose acquisition companies (SPACs) has captured significant attention in the venture capital community. These blank-check outfits are taking public fairly nascent tech companies, giving retail investors access to high-risk, high-reward startups that would otherwise be out of reach.
This trend could slow the extent to which VCs begin incorporating more "ordinary" investors into the asset class. However, absent any last-minute changes, Reg CF’s increased thresholds will provide an opportunity for European venture firms to explore crowdfunding as a viable fundraising path.
Conclusion
Passion Capital’s decision to crowdfund its latest vehicle marks a significant development in the European venture capital industry. While there are challenges ahead, this move presents an exciting opportunity for other firms to follow suit and explore new fundraising strategies.
As the regulatory landscape continues to evolve, it will be interesting to see how European venture firms adapt and respond to these changes. One thing is certain – the future of crowdfunding in the venture capital space looks brighter than ever.
