By all accounts, crowdfunding is still in its infancy.
For the unfamiliar, crowdfunding is where individuals join together to raise capital online.
Crowdfunding, as we know it now, comes in two flavors:
- donation-based crowdfunding: Individuals band together to fund projects, events, and social causes. In return, individuals donating via crowdfunding receive the pleasure of doing good and frequently, there’s some type of prize associated with giving levels (not unlike general charitable giving campaigns).
- equity-based crowdfunding: In this type of crowdfunding, individuals don’t donate money — they invest it. Typically, funding is restricted to accredited investors (who meet certain net-worth and/or income levels) who receive an equity share in a company in return for their money. The JOBS Act in 2012 set the stage to open equity crowdfunding to the non-accredited investor audience (read, everyone else), though in reality, guidelines have not yet been set.
How traditional VCs view crowdfunding
Clearly, equity based crowdfunding (and crowdfunding, in general) has the potential to really change the way we invest in private companies. I think there will always be room (and money) for good institutional investors (i.e.- venture capitalists). Other mediocre investors threaten to be pushed aside when individual investors gain access to private deals.
So, it’s pretty interesting that when polled, venture capitalists are pretty positive on the emergence of crowdfunding. A recent survey, Equity Crowdfunding and Venture Capital, polled VCs and private equity lawyers on their thoughts about this new form of finance.
- good legislation: 2/3 of respondents think the JOBS Act is a good idea.
- next year is the time: the majority of VCs believe 2014 is the magic year when the SEC will formally enable equity crowdfunding to occur
- fraud concerns: fraud’s a big issue and 35% of those surveyed expect to see some type of fraud
- investor relations a big deal: About a 1/3 of respondents think investor relations is going to struggle as crowdfunding platforms must manage investors post-issuance
- lots of money to raise from: less than 1/4 of VCs polled think there will be a problem raising funds for startups online.
The money question comes near the end of the survey: Do you expect equity crowdfunding to “crowd out” traditional venture capitalists/accredited investors?
33% Yes/ 67% No
Takeaways from the Equity Crowdfunding and Venture Capital Survey
I speak with investors everyday who are excited — truly excited — about the prospects of unbundling the traditional fund manager structure to DIY invest in startups. With my career spent in stock market investing, I’m continuously surprised to feel that positive energy (when was the last time you met someone who got genuinely pumped over a mutual fund??).
But venture capitalists raise a valid point. How do you make money investing in startup companies? By being very careful. By creating a diversified portfolio. By taking relatively small bets.
There will be money lost investing in startups. There always will be — it’s a numbers game. New investors to the space should understand that with this new-found access comes responsibility.
That’s why at OurCrowd, we created a hybrid crowdfunding model that take the best from venture capitalism (research and portfolio management) and angel investing (the DIY investing ethos).
Interested in investing in some of the best Israeli startups? Join OurCrowd today (accredited investors only).