VCs like to invest in digital innovation, but their own business is artisanal – with a small number of partners making a few big decisions on ventures that are physically close to the VC office.
That is the backdrop to the equity crowdfunding disruption that this 4-part series is describing.
The idea of Internet disrupting venture capital has been forecast for a long time, but it is happening now. A big driver of change is anticipation of a tax change to “carried interest”. Today the 20% Carry fee is taxed at the Capital Gains Tax rate, not the Income Tax rate in America (which is home to most VC Funds). Many argue that Carry is a risk-free fee for service that should be charged at Income Tax rates. This matters as Income Tax is charged at a much higher rate than Capital Gains.
Politicians who want to tap into populist rage about inequality will find a way to present this rather wonky subject in a way that resonates with “sticking it to the man”; so change to how carried interest is taxed is likely enough that a lot of people who have a track record investing in startups, become “solocapitalists” who invest their own capital. As this article explains, solocapitalists are “distinct from angels, super angels, and venture capital firms.”.
This will change the fundraising landscape which currently looks like a pyramid with individual investors at the bottom and top tier firms at the top. In the middle are all the second tier VC firms who in aggregate deliver worse returns after fees than a passive Index fund or ETF.
The rise of the solocapitalist is backdrop to the disruption coming from crypto powered equity crowdfunding.
This is all good news for entrepreneurs. Although it represents harder work for investors, there is lots of opportunity for those who ride this wave with skill. The top tier VC funds will continue to do well as they bring a lot more than just capital, as long as they can retain top talent. For example, Revolut, poster child for crowdfunding, also took money from Balderton.
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