There are concerns that startups using crowdinvesting will be those that are unable to receive funding from the traditional sources such as angel investors or venture capitalists. It’s a concern that is without merit and neither speaks to nor considers the shortcomings of the existing system for early stage finance. Additionally, we are assuming that the crowd will only bring capital to the table without any other benefits. This mythbuster is intended on debunking these misconceptions.
Myth: Startups who use crowdinvesting for capital are at the bottom of the litter.
Traditional funding sources such as venture capital or angel investments are heavily restricted by geography as well as personal networks. With these immense obstacles in place it’s clear why much of the innovation arises from the bicoastal areas of the United States. Delving into the history of funding there are also many personal connections that allow startups to get off the ground by receiving the capital injection they needed at a critical time of growth. This restriction on capital does not speak to the investment worthiness of the enterprise nor its founders, but only to the closed-wall system that defines early stage finance.
The impact of online deal sourcing will extend beyond just the crowd and even professional investors will be using the internet as a primary method to find the most interesting deals. People assume that the concept of ‘crowdinvesting’ exclusively revolves around those retail investors that are only able to commit small amounts of capital such as $100, but actually the concept of crowdinvestment will reach much further than that. The crowd capital will be an additional source of capital that will bolster what was once a highly restricted and somewhat limited community.
Capital is often mistaken as the only thing that the crowd will bring to the table. Capital is only one of the limited resources that the crowd will provide to the startup investment ecosystem. One of the most powerful value propositions that the crowd is able to bring to the table is crowd validation of a business model. Oftentimes startups have the most trouble in their customer development phase and with the crowd getting involved, startups are able to remove the risk of whether or not people will like, let alone use, their service or product. When you have a large group of investors, you can be relatively certain that crowdinvestors will be avid supporters of the business and/or startup.
It’s extremely shortsighted to say that crowdinvestment is reserved for terrible businesses that have no shot with professional investors and as such retail investors will be caught investing in startups of lower caliber. Crowdinvestment represents a tremendous opportunity for those startups that did not have any access to capital to grow as well as everyday investors to get involved in exciting and innovative startups that have tremendous profit potential.
The internet has changed many consumer behaviors which were once thought to be wild. Think Amazon, Ebay, and now the countless shopping sites that exist today. Just as the internet allowed us to buy things with a click of a mouse, crowdinvesting will change the way entrepreneurs raise capital and investors invest. The world is quickly digitizing, and it’s about time startups and investors jump on the boat.
What do you think?
By Sang Lee