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VC Lab Wants To Make Startup Investing Easier

Operations & Management

Isadora Teich wrote this article

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Did you know that startups and small businesses drive half of America’s economic growth?

In fact, according to a 2016 report from the Kauffman Foundation, startups make up about 15% of all businesses. Even though they are a small part of the overall picture, they generate 50% of all job creation.

Despite this, creating, funding, and getting funding for startups is no simple task. This is how VC Labs want to try and make the startup investing process simpler.

A Quick Look At The Startup Ecosystem

There is a lot more to the startup ecosystem than many outsiders think. The myth of the solo-genius entrepreneur who did it all alone still has a lot of power in the public imagination. However, this is almost never true.

At the most basic level, it takes a small team to start a venture of any kind. If that business will scale, even more people need to be involved. There are reasons why online you can find countless diagrams showing exactly what this ecosystem includes, like this one:

Via Wikimedia

All of these people and organizations come together in various ways to create successful businesses. As you can see, funding organizations and investors are big pieces of the puzzle.

The Problem With Startup Investing

It’s well known that getting funding is a major hurdle for startups. However, fewer people are probably aware of the hurdles that come with startup investing and creating funds.

Creating a fund is actually incredibly expensive and involves a lot of red tape. The paperwork is complex and the process can be long. In order to do this, you need the help of lawyers with specialized expertise. Their time may cost more than $100,000 to set up a single fund.

VC Lab’s Solution

VC Lab is an accelerator for Venture Capital firms. They want to remove this hurdle. They are doing so with a universally accessible set of free boilerplate documents, which you can find here.

These documents are meant to accomplish several things. They are meant to streamline this entire process, save time, and make fund governance structures more accessible to more people who wish to get involved in the world of startup funding.

According to VC Lab co-founder Adeo Ressi,they last enrolled investors from over 60 countries around the world, and the last thing these passionate professionals need is to be so bogged down with legal details that they can’t get anything done. He says:

“The new managers who are getting into venture are coming in with a passion for change — the funds often have a very focused thesis, and they tend to be smaller in size. They really want to help the companies they work with to succeed at any cost. They don’t need 200 to 400 pages of legal agreements governing every small decision that they make. They need lean and light, easy-to-use agreements.”

How Does It Work?

VC Lab is calling this package Cornerstone. In its entirety, it is 33 pages long. It includes a term sheet, subscription agreement, LPA, and user guide.

While 33 pages is not exactly nothing, it is important to understand just how much VC Lab has managed to condense this process. It is not unusual for fund formation documents to be hundreds of pages in length.

VC Lab worked with startup lawyers to create Cornerstone. It was co-authored by longtime Silicon Valley startup lawyer Hans Kim. He said it is well known in the industry that this process is way more complex than it needs to be, and often prohibits potential investors from getting involved.

This is bad news for investors, founders, and the industry in general.

Why Is This Such A Problem?

Of course, competition in an industry is good. It pushes performance, innovation, and change. However, the startup industry is infamously difficult.

90% of startups fail and the second biggest reason that startups fail is that they run out of funding. This makes a lot of sense, as while industry news is always a buzz with how much venture capital is pouring into different types of companies, the truth is that the vast majority of companies will never receive any of the benefits of startup investing.

Every year, about 500,000 new companies are founded in the US. Out of these, venture capitalists invest in less than 1,000. This means that, the vast majority of companies that try to receive funding won’t get it.

The Winner Takes It All

One great example of this is within the controversial facial recognition tech niche.

More than $500 million of venture capital has flooded into these companies in 2021 alone. Whether governments and individuals like this technology or not, monied interests love it.

It is important to keep in mind that over half of this money went to only one facial recognition startup, Israel-based startup AnyVision. Softbank, of WeWork infamy, supplied them with funding for their technology, which is currently used in places like schools, retail stores, and casinos.

So, businesses need funding, but most of them can’t get it. And many potential investors who want to start funds are put off by the expense and complexity.

Another hurdle is the fact that there is a shortage of lawyers with the expertise they need. Many investors who have the money and the time may struggle with finding available legal counsel.

More About Cornerstone

Via VC Lab

In such an environment, opening up the floor to more investors could only benefit both investors and companies. After all, more funding going to more companies means more innovation that pushes society forward.

VC Lab has made a lot of improvements to what was previously a complex and expensive mountain of startup investing paperwork. This includes a streamlined list of definitions, simplified sections on management fees, and triggers for a limited operator mode.

Currently, using this paperwork, you can domicile a firm in the United States. However, startups are truly a global phenomenon, so VC Lab has plans to expand. They will offer popular global startup hubs like Canada, the Netherlands, and Singapore soon.

According to fund formation lawyer and Cornerstone co-author Rich Gora, users will still need to finalize things with a lawyer. However, it empowers people to have conversations and set terms in plain understandable language before they move forward.

Final Thoughts

This is actually incredibly exciting for both investors and startups.

Investors want to invest and startups need their support, but there has historically been an obstacle course of legalese between them. Anything that makes the startup investing process simpler is amazing news for everyone involved.

What do you think? Talk to me.

 

About ChopDawg.com: Since 2009, we have helped create 350+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.

 

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