Crowdfunding Can Be Very Good for Business

by Crowdfundinglaw

As the concept of lawfully using crowdfunding in the United States for equity investments in startup companies continues to build support on Capitol Hill, Carol Tice opines in Entrepreneur that this mechanism for permitting a multitude of small investments by a large group is “bad for business”.   As grounds for this belief, Tice asserts that investors who only make a small investment through the “crowd” will likely have neither the incentive nor the ability to provide the “high-quality expertise” that early stage companies “need to be successful.”  Because this argument substantially misses the value and huge opportunity that crowdfunding provides to entrepreneurs in favor of an idyllic version of VC and angel investment, I must respectfully disagree.

The starting point for her conclusion that crowdfunding would be “bad for business” is rooted in this assumption that angel investors and venture capital firms provide assistance to portfolio companies in a manner that materially impacts the success or failure of the venture.  I am afraid that this is a claim that even venture capital firms and angels investors would seldom seriously make.  The often ballyhooed claim by investment groups of a “value–add” (“our money is more valuable than their money because of the value we bring to your business”) is not even routinely realized by entrepreneurs.  Sometimes…but not often.  This is the case with even the highest pedigree of specialized VC firms, let alone lesser firms, angels and angel groups.  Stretching a “value-add” claim to a prediction of overall success or failure of the entire venture is simply a claim I have never even heard.

Further, I know of no venture capital firm who would even make an investment in a startup management team if they perceived that success or failure would be materially impacted by the value and guidance the investors could bring.  Venture firms have a broad portfolio and tend to be very stretched operating their own companies, reviewing potential deals and monitoring portfolio investments.  Being responsible for the success of the venture is something they have neither the time nor the inclination to do.

Suggesting that crowdfunding is “bad for business” based on this idyllic concept of venture and angel investment totally overlooks the actual potential of this new capital raising tool.  The reality is that, in most cases, investors of all kinds only bring cash and, well, cash is simply cash, no matter the source.  If it is enacted into law in the United States, crowdfunding will enable the pooling of capital to provide new business funding in a way never realized before.  Further, the democracy of the crowd itself will help vet successful business plans and models and will level the playing field in order to provide capital on the most favorable terms to new entrepreneurs with good ideas.

At a time when banks are not lending for new businesses, venture firms are shying away from early stage investing and angel investors demand unreasonable rights and valuations, crowdfunding offers the chance to use the power of social media to enable new business funding and related job creation.  This is the power of social media and the internet.  It is the future.  This is not to say that there are not genuine concerns that should be addressed in this legislation in order to protect against real issues such as fraud and abuse.  That is being done in the proposed legislation.  However, suggesting that crowdfunding should be avoided based on a polyanish view of existing funding alternatives does little to advance the debate and realize the potential.