In my initial post I took issue with an opinion piece that suggested that crowdfunding is a bad idea because it will not provide early stage companies with the strategic insights and networking help offered by alternative investment sources such as VCs and angel. Crowdsourcing.org was kind enough to reprint that post here. Given the questions and feedback received so far, I thought I would clarify a few positions:
Crowdfunded Companies Can Benefit From Experienced Guidance: Clearly, any new business can greatly benefit from seasoned business experience and sector specialization. What I was responding to was the suggestion that VCs and angels routinely provide this guidance and that this guidance plays a material role in the ultimate success of the company. I don’t believe this is the case. Further, I do not know any VCs or angel groups that believe this is the case. I also have a confidence that crowdfunded companies will be able to leverage experience and expertise without any investment from traditional sources. An expanded “crowd” ownership model only increases the likelihood that help will be available from actual investors. Beyond investors, great resources such as Startup America will put your startup in touch with proven experts. Register for startup help. Its free (VC and Angel help is far from free).
Some Crowdfunded Companies Will Fail for Lack of Experience: Yes, some crowdfunded companies will not succeed and part of that failure rate will be due to inexperienced founders. Against a VC “success” rate that anticipates 80% failures, I am willing to give the wisdom of a broad-based crowd a shot at predicting better success. I doubt it will be worse. There is plenty of risk in early stage investments. People in the crowd need to be aware of that and the maximum investments should be limited (and will under every proposal). However, this is, again, not worse than what is expected in VC and angel backed companies.
VCs and Angels Have a Role in Early Stage Finance: Clearly, VCs and angel investors provide much-needed capital for early stage businesses and will continue to do so. However, numerous studies show that VCs are investing in early stage companies with less frequency after the economic crash. Angel investors tend to be very slow and unpredictable and often expect unreasonable rights and valuations. In this financing atmosphere, crowdfunding stands to play a huge roll. Crowdfunding will not be right for every early stage business. If you are in a high capital business like many renewable energy companies, crowdfunding probably makes little sense because crowdfunding rounds will be capped at relatively a small number (likely $1 million – $2 million) and subsequent investors are unlikely to want to deal with a large existing shareholder base. This type of business will still need a limited number of investors and will only make sense in a VC or angel financing round. VCs and angels will remain quite necessary–but crowdfunding stands to fill a big void in the right sectors.