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Lowering the cost of capital, may not be the answer.

February 24, 2013

The last week has been full of chatter about the First Angel Network and the way they operate.  In our society, everyone should have the right to be able to charge what they want, for the services or products they offer.

The problem I have with FAN is the lack of disclosure about the 8% of the total proceeds of the transaction going to the organizers.  This is obviously a direct conflict.   Are the organizers incentivized to bring the cream of the crop in front of the group?  Or are the incentivized to prey on a company that they know will take the deal, knowing they will get their 8%?

I would suspect that demand for capital is rising in the region.  Supply is also growing with the recent exits.  There is more supply directly (from these exits) and indirectly from national groups that have never considered this region investment worthy.  This should naturally drive down the cost of capital and provide entrepreneurs with more choices for their capital needs.

If FAN continues to operate in the way they feel is sustainable and more supply is available in the region at better terms, eventually the model will fail (unless they truly are adding lots of value beyond the investment).  It’s natural selection, baby!

If this natural selection process works and we successfully bring more capital to the region at better terms, will it be the change the community needs?  I actually don’t think so, and maybe too much focus on FAN’s model isn’t where we should be focusing our energy…  According to the Kaufmann Foundation “less than 20% of the fastest growing companies in the U.S. took venture money.”

If cheap capital were an indication of direct success, we’d see more and more successful companies being spawned directly from the funding of all the local government agencies.

If the supply grows too quickly, demand will surely rise.  This is where cheap capital will backfire, because talent will be locked up in pockets of startups and the quality of startups will remain constant, making it harder for them to raise follow-on capital.

As a community we need to work together with new and existing startups to help them grow in customers, talent, exposure, finances and raising capital.  We can’t just simply focus on the raising capital component, when there are so many other variables that can increase the likelihood of success!

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