Crowdfunding vs. VC or Angel funding

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Will crowdfunded start-ups perform better than purely VC or Angel backed start-ups?
This is an interesting question to consider. On one hand if a company can raise money from a VC or Angel it is a big vote to the prospects of the company. I assume most of the really good start-ups or ideas don’t make it to the crowdfunding platforms because they are snatched up much quicker by these bigger investors. That means the investments available through crowdfunding will be second tier in many cases.

There is also an additional aspect to consider if a company is already backed by a VC they will be able to help more with the company’s management and be able to reach out to their entire business network. These VC’s will also be able to pump in more money for additional fundraising and they will be looked at as a stamp of approval by other VC’s who are considering funding as well.

So in general, I think the VC funded start-ups will perform better in the near future. Until the crowdfunding option becomes more streamlined and is able to produce some big exits I think the success will still remain with VC’s. At some point though, crowdfunding should start to attract better start-up offerings for investments.

I think the exception will be the start-ups that use a mixture of funding. In fact I think that all VC’s should encourage their portfolio companies or prospective portfolio companies to pursue a portion of their funding through crowdfunding. The reason is that this gives the company and the VC investors a very good gauge of how the public perceives this start-ups idea or vision. If the crowd is willing to put money into the idea then it is a good indication that the product or service will gain traction when it starts selling to the public. It will allow the VC investors a gauge to mitigate certain risks which will overall mean smarter investment choices. The companies who can successfully meet their crowdfunding goals will then have a better chance of success than companies who didn’t pursue (or pursued unsuccessfully) crowdfunding.

Another aspect to consider is that the crowd who invested in the project have a vested interest and financial incentive to see to the success of the company. This means the company has investors who will turn into salesmen for the product or service. They will use the product and they will tell their friends and family about the product. Although this won’t make a bad product succeed, it will certainly help to give many ideas or products a much better chance of success by getting the masses to try it out. Every investor will become a salesperson for the product without costing the company a dime.

I think in the long run this will be the model that most start-ups will pursue. I also envision a future for the crowdfunding industry when the platforms will have strategic partnerships with some big VC funds. When the platforms receive an application they will go through their regular vetting/approval processes and then these offers will be shown to the VCs. The VCs will then have an option to invest in the company and act as a sponsor on a contingency basis that they are able to raise the rest of the funding through the crowdfunding platform. This will be a win-win situation for investors-start-ups and the VC’s. The start-ups won’t have to worry about chasing down VCs and making presentations as the platforms will do much of the initial introductions. The VCs will have the advantage of committing money only on the basis that the company can find funding from the crowd. The investors will have the advantage that the companies they invest in will be backed by big VC firms which will be able to offer their experience and professional contacts. Is this the future structure of start-up funding?

In five years from now, I would love to see if crowdfunded start-ups have a better success rate than their regular non-crowdfunded counterparts.


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