Why Kickstarter and crowdfunding can’t replace traditional investors

Illustration by André da Loba

Illustration by André da Loba

Editor’s note: This is a guest post by Aaron Pitman, an angel investor and founder and partner of RA Domain Capital.

If you’ve ever been to a big, rowdy concert, you’ve probably witnessed the phenomenon of crowdsurfing. This happens when a musician or fan takes a leap of faith from stage, knowing the crowd will carry them to safety. Using crowdfunding for your startup venture is much like crowdsurfing a rock concert — and also carries the same hazards that, at any moment, someone might drop you to the ground.

Still, Kickstarter success stories seem to be everywhere. The late, great teen detective television drama Veronica Mars broke all manner of Kickstarter records on its way to funding a theatrical edition. TV star and indie darlingZach Braff took to Kickstarter (not without his detractors) to fund his next independent movie. At this point, it seems like every other day celebrities and regular ol’ entrepreneurs are using the crowdfunding platform to raise needed capital.

So why shouldn’t you skip traditional investors and take your business plan straight to the people? Are traditional investors really that great when you can leverage your social networks for cash? This is the question the Kickstarter trend has inspired in a great number of entrepreneurs, who are hawking ideas from next-gen watches to artisanal sodas on the platform.

But, for startup founders looking to create a company built to last, is Kickstarter really the way to go? Here are some reasons traditional investors are still the the best bet for startup funding:

Rushing to market

Starting up a Kickstarter campaign instantly puts a ticking clock above your head when it comes to delivering your product or service. Not everyone has the Hollywood contacts of Zach Braff, and trying to develop your business with a list of Kickstarter backers following your every move can be more stressful than comforting.

This is especially true for those developing hardware or consumer products that need to go from daydream to manufactured reality. A Boston Globe articleexploring the downside of crowdfunding new businesses noted the example of a man who raised $87,000 on Kickstarter in 2010 for a lock-picking set. He quit his job to fulfill his orders and imagined starting a great new business from the seed money.

What actually happened, however, was a much sadder story. The manufactured lock-picks snapped too easily, his backers started to turn on him, and soon he was being contacted by the Massachusetts attorney general’s office. He never managed to start up a company, and now he’s back to working a day job and trying to fill his Kickstarter orders on the side.

This obviously isn’t the tale of woe told by every crowdfunded entrepreneur, but often the flashy nature of big campaigns hides the darker truth that they don’t always turn out as planned. Traditional investors might not be trendy, but they have the knowledge and experience to help you position your company without a built-in consumer base already watching your every move and misstep.

By rushing products and services onto the market before they’re field tested and ready to go, crowdfunding can actually crash land your idea before it ever has a chance to soar.

Investors provide guidance

One of the biggest benefits of traditional investors is located in their brains, not in their wallets. Sure you can raise your seed money on Kickstarter or another crowdfunding platform… then what? Many newbie startup founders and first time entrepreneurs need the guiding hand of an investor who has been where they are and can help avoid the pitfalls. Your crowdfunding backers are looking for a finished product, they’re not going to provide you the means to make your dreams a reality.

For instance, thanks to the recent JOBS Act small investors can now receive equity in exchange for donations. Crowdfunding platforms like Fundable are unsurprisingly jumping on this new bandwagon.

But is giving away equity in your company to someone with the fattest wallet really a good idea? The traditional investor comes with a lot more than a thick roll of cash. They also come complete with an impressive list of industry contacts and experiences from which you can draw.

Most investors don’t throw money at just the coolest ideas, but rather invest in entrepreneurs with businesses they understand and can help push in the right direction. Using crowdfunding, you might score a host of enthusiastic backers chipping away at your equity as they donate, but enthusiasm won’t help you navigate startup woes or put you in contact with the right professional network. Traditional investors, however, can.

What happens if you fail?

On Kickstarter, you can promise products and rewards for backers who pony up cash to make your big dreams into a reality. But what if your company crashes and burns? Not only did you lose out on your entrepreneurial dreams, you still have Kickstarter rewards to honor.

According to Kickstarter’s accountability guidelines, users are legally required to fulfil their campaign obligations. This can easily leave you in the lurch if you dreamed big but didn’t have the guidance of investors and their networks to bring your idea in for a safe landing.

Ethan Mollick, a professor at the Wharton School of Business, told NPR that raising money through crowdfunding is a brave new world. “Enthusiasm is ahead of [the] tools,” he noted.

Crowdfunding might be trendy at the moment, but there’s a reason the traditional investor structure has held up over the years. Traditional investors don’t just offer funding, they also offer guidance, contacts, and industry experience. So before starting your Kickstarter campaign, remember you might still want to think about finding investors to help smooth your company’s rise to the top.

What do you think? Can Kickstarter and other crowdfunding platforms replace traditional investors? Why or why not? Share in the comments!

[Source: Aaron Pitman contributor to The Next Web]



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