You really don’t need venture capitalists anymore. The frankly elitist business practices and sensibilities espoused by many VCs no longer need concern startups at any stage of the game.
This should come as a relief for entrepreneurs who want to retain full ownership of their companies — or even for those who just who don’t want to be bossed around the way some venture capital firms’ business advice can come off as.
The amount of money being raised through crowdfunding has at least caught up with venture capital.
The last numbers put out on the matter clocked both phenomena at about $30 billion a year — although some have suggested higher figures for crowdfunding, but that may have been overzealous.
VC and Crowdfunding, Sure
Now this isn’t mutually exclusive. In fact, VCs now coach their companies to also do at least one round of crowdfunding as a proof of concept, to demonstrate demand for their product or service.
Using crowdfunding as the first round of sales to early adopters is just one flavor in this now diversified marketplace of funding mechanisms.
Although most VCs primarily make equity investments, crowdfunding has expanded to also include several financing models: loans and other debt instruments, donations, rewards, product distribution and even real estate holdings.
That helps explain why crowdfunding has gone from raising $880 million in 2010 to at least the amount that VCs are raising annually — and closing in on the amount that private equity raises.
Today there are several crowdfunding platforms that have each raised more than what the entire industry brought in during 2010.
Not surprisingly, there has been an explosion of apps and websites that purport to help entrepreneurs raise money through crowdfunding.
Too Many Tools to Choose From
One overzealous report declared that there were over 1,250 different tools and platforms for crowdfunding in 2015.
While the real number falls at least one digit short of that, there’s still enough to overwhelm most startups.
Most startups already have their hands full with day-to-day operations and have neither the time nor resources to choose from so many.
Many of these options also count on that and price their services in a way that is actually unfair to many startups — taking advantage of the fact that they might not have enough time to shop around effectively.
Exacerbating this problem, both startups and consumers who want to invest in them face a deregulated playing field that — well, there’s no insurance for either side of the equation.
The relevant deregulation started with the Jumpstart Our Business Startups (JOBS) Act of 2012; the law made it legal for unsophisticated investors to participate in equity crowdfunding.
After that, the Securities Exchange Commission spent another three-and-a-half years hashing out the details on the exact method of implementing the law.
Since then, the Trump Administration and Congress have made moves in surrounding legal territory — including easing up the product approval processes for pharmaceuticals and automotives.
Additional legislation targeting the financial sector suggests that the playing field for fundraising could become even more dynamic.
All of this adds up to a much more competitive landscape than what the early days of crowdfunding looked like — when Kickstarter was the only game in town.
That was over nine years ago, at the tail end of the credit crisis — indeed crowdfunding has played an enormous role in pulling the economy out of its last major trough.
And speaking of troughs, here comes a spiel on risk. You can’t do this alone anymore — in a sense, that’s been the premise of crowdfunding all along.
But more to the point: initial signs suggest that increased volatility in the public markets have the potential to ricochet into private marketplaces like crowdfunding.
Fortunately, there’s no direct correlation here — one of the things that made the credit crunch of 2007 to 2009 cut so deeply was the fact that all investment assets moved in sync, which usually never happens.
Know the Markets
However, you do want to have someone on your crowdfunding team who at least knows what’s going on in the public markets. Here’s why: It affects the pocket depth of big fish investors in crowdfunding campaigns.
These folks tend to have both public and private investments — diversification gives these people’s portfolios real performance.
But if and when these investors’ holidngs in public companies take a hit, that might decrease appetites to invest in crowdfunding campaigns.
So knowing the investor mix that patronizes each of the different crowdfunding campaigns will help you navigate that complexity.
The fact that crowdfunding has diversified into different business models necessitates that.
Think of the way the world of venture capital entails a succession of tiers or rounds of funding — that’s the way to look at the differences between crowdfunding platforms.
Seed Funding Through Series D
The same way you have seed funding, angel investors and then series A through D or more, that mindset needs to extend to crowdfunding.
Unfortunately, a lot of the folks doing crowdfunding campaigns come from marketing backgrounds and thus don’t understand the difference between the aforementioned different types of funding — let alone how they compare with the strata of crowdfunding.
As for whether a crowdfunded company could go on to receive venture funding or even go public, none of that is part of the marketing-centric providers’ lexicons either.
Pay Taxes on Crowdfunding
Also likely to be missing from the marketing providers’ tools is any depth of understanding the tax implications for the different funding models — crowdfunding via donations versus rewards, loans, equity and real estate.
These differences in tax treatment gained complexity in this year’s Tax Cuts and Jobs Act, which was less than clear about how small business owners can handle a host of issues — the exact mix that come into play depend on the size of the company, the fundraising goal, industry and funding model used.
An accountant or lawyer can help with these issues but that typically involves paying an hourly rate for things you might not need.
Tell Your Story to the Crowd
Have you noticed the prevalence of words and video content on different crowdfunding sites? And you’re finding these campaigns from links on other social media sites, right?
Indeed, the right storyteller (with social media chops) can help you raise that money — you want the narrative to come from someone who’s akin to an investment banker trapped in the body of a writer.
This will cost you a lot less than anything else on the market and achieve a return on your investment.
Fellow entrepreneurs, what kind of experiences have you had with trying your hands at crowdfunding? Please tell us about it by posting in the comments section beneath this post.
Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.