Equity Crowdfunding Isn’t a Threat to Venture Capital

Picture Courtesy of Crowdsourcing

Equity Crowdfunding can open new doors for venture capitalists. (Picture Courtesy of Crowdsourcing)

BY Scott Shane  – Enterprise   The Jumpstart Our Business Startup, or JOBS, Act of 2012 will make it possible for companies to raise up to $1 million by tapping individuals through online portals, just as soon as the Securities and Exchange Commission has written the rules for these investments. Some observers claim that equity crowdfunding – these efforts to raise small amounts of equity from many people to finance a business – will “spell trouble for the guys on Sand Hill Road” and “quickly push aside more traditional capital providers like bad VCs.”

I disagree. Equity crowdfunding is not a substitute for venture capital. Different entrepreneurs starting different types of businesses will raise money from equity crowdfunding than those who have traditionally tapped venture investors.

For equity crowdfunding to be a substitute for venture capital, entrepreneurs that would have tapped venture capital will have to bypass them and raise money from the public directly through crowdfunding portals. That’s implausible for many venture-backed companies. The median venture-capital investment was $4 million in the first three months of this year, Dow Jones reports. The typical venture-backed business can’t switch to equity crowdfunding to raise the money it needs because entrepreneurs won’t be allowed to tap more than $1 million through that avenue.

Many startups seeking less than $1 million will still favor venture capitalists over the crowd. If additional fundraising is in the cards, having one or two large investors will prove much less cumbersome than having numerous small ones. If they aren’t doing well, managing the dissatisfaction of one investor will be easier than dealing with numerous upset financiers.

Venture capitalists give entrepreneurs more than just money. Many of them understand how to build startups – more so than the typical investor providing funding through an online portal. Many VCs can provide introductions to potential suppliers and customers and give assistance rounding out a management team.

Many VCs have connections to companies that can acquire startups and ties to the investment bankers that take them public. Those connections are worth something to many entrepreneurs seeking to exit from investments in their own new companies.

Venture capitalists aren’t likely to get locked out of deal flow once equity crowdfunding comes on line. VCs can easily access to all of the deal flow that investors in crowdfunding portals are tapping. While venture capitalists pride themselves on their access to the best deals, these portals will make it easier for them to learn of any opportunities they might have missed. So we should expect VCs to join these crowdfunding portals to ensure they don’t miss any good deals.

Equity crowdfunding portals will complement venture capital by broadening the “friends and family” slice of informal investing. Venture capitalists will continue to concentrate funding on high potential new companies in high technology industries. Equity crowdfunding will provide businesses in other industries – restaurants and retail establishments, for instance – and companies with lesser growth potential with a new way to raise money. Just as Facebook expanded our friends to include people we are connected to online, equity crowdfunding will expand “friends and family” investors to include strangers whose money we tap through investment portals.

Source: Scott Shane – Enterprise
Link: http://www.entrepreneur.com/article/228738

Tags: , , , , ,


BloombergCouples Desperate For Children Turn to Crowdfunding FertilityBloombergCrowdfunding has become a popular mechanism for many couples who can't afford the high costs of IVF, or adoption and surrogacy. “It's not an easy thing to share publicly,” says Crystal Barrett, 33 [...]

Mountain XpressFaces in the crowd: WNC crowdfunding initatives | Mountain XpressMountain XpressEach week, Xpress highlights notable WNC crowdsourcing initiatives that may inspire readers to become new faces in the crowd. This week features a feature ...and more » [...]

Crowdfund InsiderMassive Rule 147 Amendments May Be On The Horizon Impacting Intrastate CrowdfundingCrowdfund InsiderAlmost a year ago, the SEC proposed certain amendments to the current Rule 147 which were intended to help foster, and increase the viability of, Intrastate crowdfundin [...]

AZCentral.comTiny companies lure investors under Arizona crowdfunding lawAZCentral.comInvestors who make bets under the state's one-year-old crowdfunding law certainly have the potential to get in on the ground floor, but they must be patient and might not receive any returns. Th [...]

MarketWatchWhy a crowdfunding site is giving out $10,000 scholarships ...MarketWatchIt's another indication that families are struggling with college costs.and more » [...]

Huffington PostReal Estate Crowdfunding's Pathway of ChangeHuffington Post“Crowdfunding is just the Internet,” stated Attorney Mark Roderick as he opened last month's RealCap Chicago. RealCap is an annual conference that joins crowdfunding leaders and innovators to propel th [...]

BBC NewsNHS trust 'relies' on crowdfunding to equip wardBBC NewsAn NHS trust has launched a crowdfunding appeal to buy equipment for a new hospital unit because "it cannot get started without donations". The Royal National Orthopaedic Hospital (RNOH) in Stanmore, n [...]

MottoIVF: More Couples Crowdfunding to Pay for Procedure - MottoMottoMore and more couples are turning to crowdfunding to fund costly in vitro fertilization (IVF) treatments, Bloomberg reports.More Couples Who Can't Afford IVF Are Turning To Crowdfunding For HelpRomperCouples des [...]

EntrepreneurIs Crowdfunding Right for You? Answer These 7 Questions to Find ...EntrepreneurLess than a third of crowdfunding campaigns reach their financial goals. Will yours be one of them?and more » [...]

ForbesVenture Crowdfunding Revisited: An Update with NIN VenturesForbesI am about to head off to attend the Global Crowfunding Convention (GCC) 6 in Las Vegas. It will be my fourth time attending. The crowdfunding industry has grown from $16 billion in 2014 to $34 billion in 2015, and [...]

CFB Finance

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |