startup vc

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Myth: One of the paramount concerns in the field of crowdinvesting is whether there will be a noticeable depreciation in the quality of investment deals that will be made available once regulations are finalized. Companies that aren’t deemed “VC-worthy” will naturally gravitate to the crowdinvesting marketplace as a last resort, enticing unwary investors with less than favorable offerings.

 

The Reality:

This is, for the most part, an incomplete depiction of startup investing and entrepreneurial decision-making as purely profit-driven practices. A startup’s lack of VC funding doesn’t necessarily indicate its lack of business value; conflating the two severely circumscribes the realities of early-stage finance and fails to take into account the fact that many companies intentionally forgo the VC route altogether. Here are 2 reasons why crowdinvesting will NOT attract “leftover” or less favorable startups:

1. Companies oftentimes forgo VC funding and VCs aren’t exclusively qualified to evaluate investment opportunities

Some entrepreneurs may want to maintain ownership; others might wish to control their deal terms. And those that desire VC backing but fail to receive it may simply lie outside the scope of investment trends. Whatever the case may be, establishing VC approval as a prerequisite for startup success relies on the wild assumption that VC firms are the only qualified umpires of what constitutes smart investment decisions.

 

2. Investment “Quality” is Redefined

Of course, this isn’t to say that crowdinvesting won’t have its fair share of disappointments; it’s unrealistic and naïve to assume that all crowdinvested companies will make great exits and provide investors with lucrative returns. With the enhanced accessibility and visibility that this new funding mechanism will provide, it will only be natural for there to be a marked increase in the variety of deals that will be transparently available. But as the concept of value-driven investing (social impact, CSR, meaningful, what have you) enters investing discourse, there is an observable reevaluation of the prevailing principles that have long guided investment decisions. Some crowdinvested startups may be purely profit driven, whereas others may promise a mixture of both profit and impact. This increased diversity in deals will be matched by the multiplicity of investment criteria that the crowd will bring by becoming active participants in startup financing. After all, deal quality is no longer a measurement solely defined by profitability. It also isn’t something that should be determined by a handful of individuals whose professional obligations demand profit to be a singular investment focus.

 

Our two cents:

In the end, crowdinvesting opens up the private capital markets to the general public and enables everyday people to have a say in what companies get funded and proliferate. Quality is something for the investor to ultimately decide, and the novelty of investing for future participants will necessitate proper education and added due diligence, things that platforms like RoC will provide.

 

What do you think? We would love to hear your thoughts!

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James Suh
James is the Strategy Director at Return on Change and is responsible for coordinating with all department heads in clarifying RoC’s development needs and objectives, adjusting strategic initiatives as needed. James graduated from Duke University with a B.A. in Political Science and English. His research on Lockean individualism has earned him the “Best Paper Award” of the Duke Political Science Standard, a publication of the Duke University Political Science Department that showcases outstanding research in political science by Duke students.
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One Response to “Mythbuster: Crowdinvesting Will Attract Less Favorable & VC-Rejected Startups” Subscribe

  1. Sang Lee 10/21/2013 at 12:08 pm #
    Sang H. Lee

    We should be supporting the crowd more in the desire to support innovation and entrepreneurs!

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