Can Crowdfunding and Venture Capital Coexist?
The democratization of startup funding promised by the JOBS Act has already begun, with a handful of Regulation A+ equity crowdfunding offerings already qualified by the SEC to raise capital and many others in the process of gaining qualification. Considering the early interest in equity crowdfunding and the demonstrated popularity of rewards-based crowdfunding, venture capitalists will increasingly miss out on investment opportunities as more companies raise capital via crowdfunding. This raises the question: can venture capital investment and crowdfunding coexist?
The answer is yes. Both have proven to be successful options for startups seeking capital, offering startups two distinct paths to their fundraising goal. However, venture capitalists seem to have misconceptions about equity crowdfunding and some are already downplaying its impact on the investment market.
VC Misconceptions About Equity Crowdfunding
Venture capitalists typically express three main concerns about equity crowdfunding:
Too many shareholders are a complication and distraction for business owners
Too many shareholders lead to risk and liability
Too many shareholders make regulatory compliance difficult
While issues arise in every business, these three concerns are largely unfounded. Public companies have shown it’s possible to manage a large shareholder base, and regulatory guidelines are already in place to help startups comply with all rules and regulations. Suddenly these concerns raised by venture capitalists become a non-issue. For evidence that equity crowdfunding can work, look no further than the UK, where startups are already embracing it as a fundraising method.
The Purpose of Crowdfunding Platforms
Equity crowdfunding platforms offer a digital marketplace where investors are free to meet entrepreneurs and share ideas. That is the core of who we are and what we do at my platform – and others. By removing the conventional middleman, unnecessary fees are removed from the process, thus letting the brightest business ideas rise to the top. While I understand that venture capitalists may resist this new fundraising model, my belief is that VCs will ultimately embrace equity crowdfunding.
Equity Crowdfunding: Validating Potential Startups with Real Consumers
Every venture capitalist wants to back good ideas, ones they perceive as low risk/high reward investments. With equity crowdfunding, VCs can enjoy real-time feedback and reduced investment risk, as they watch the public determine which products and services are gaining traction. Currently, three out of every four venture capital supported startups fail, but with the validation provided by equity crowdfunding, this number can be greatly reduced.
Equity crowdfunding provides a level of feedback that can’t be easily replicated; there is no greater validation than people investing their hard-earned money into a company’s future. The early market validation this provides is absolutely critical, a fact that venture capitalists are sure to appreciate. This has already been proven by the fact that many successful Kickstarter- and Indiegogo-backed companies have then been snapped up by VCs seeking the next big thing.
VCs Bring Their Own Knowledge and Skill Set
When it comes to equity crowdfunding, VCs can use a number of structures that enable them to co-invest in a company alongside new equity crowdfunding methods. For example, venture capitalists may have access to preferred stock while crowdfunding investors get common stock. VCs can also maintain control provisions including board seat allowances and anti-dilution measures so that rights attributable to the venture capitalist don’t apply to crowdfunding shares.
Such arrangements can be good for young companies and their investors, and in many cases VCs can boost an enterprise’s overall value, while still structuring deals in a way that meets their business needs. In return, VCs bring connections and know-how to the table, making it a win/win/win. The entrepreneur gets to raise money, the VC gets marketplace validation, and the crowdfunding investors get the benefit of VC guidance and resources.
So with a proper strategy and the right partners, venture capital investment and crowdfunding truly can coexist.
Ronald D. Miller is an entrepreneur’s entrepreneur having visualized, founded, built and sold five companies through management buyouts, private equity firms, private investors and public markets. Currently, Ron is a CEO of StartEngine Crowdfunding As the CEO of StartEngine Crowdfunding Inc., Ron facilitates financial ignition for innovative tech and media companies in order to help entrepreneurs achieve the American dream. Twitter: @RonStartEngine.