Crowdfunding and VC

Published on March 10, 2015

In the old days things were easy. If you had an idea to start a new business, either you funded it yourself, or asked your friends and family to chip in. And after a while, and with the growth of your company, even a bank could provide you some cash. Later, for further acceleration of the business, maybe some investors could fuel future growth. The growth of companies was impressive, but going international, or global, would take years and years. Because the world was big and it moved kinda slow.

After a big increase of VC money in the late nineties, the collapse of the internet bubble  a couple of years after, VC money today plays a more modest role. Still available, still looking to fund your dreams, but it is not easy to get it.

With the Financial Crisis starting in 2007, also the banks had an “Exit Stage: Left” and left: Today they are out, even if your growth is spectacular, your assets rock solid, but as long as you are not profitable, well,… what can I say.

Today, the world is in the palm of your hand: the other hemisphere is just one swipe away. The world turns faster than ever before and markets come and go. In 2015 it is all about “the power of the crowd”. The crowd moves, the crowd  determines your destination and the crowd rules. And the crowd funds too! And you can raise your funds literally from all over the globe, with the concept of crowdfunding.

There are a couple of great aspects of crowdfunding. As an entrepreneur you cannot get closer to your market than this: private individuals who invest hard € in your vision and mission provide you great insights – even from around the globe. Or at least this is what you should expect: the appetite of funding your idea could give you a sense of whether it will become commercially successful or not since they like it or not. On top of that, your crowd funders become ambassadors and will spread the word!  I invested some money through crowdfunding in a great new promising Head-up Display for my car some several months ago and my reaction was mild and sweet when they informed me that there were some production delays but the product will become even better, however I needed to stay patient  – for the next 9 months. Oops. But still, I am an ambassador! I never went to a birthday party where people were telling me enthusiastically about a great new product they just bought. Now they tell me about a cool new thing they have invested in, and why it is the next big thing! So they changed from buyers to investors! And of course, they say this because I work for a VC firm. And now they are investors too.

I truly think crowdfunding is a great way to fund companies. As long as it suits you. If your investors feel emotionally connected to your vision and product crowd funding provides super feedback and a world full of ambassadors. Most crowdfunding projects are in the B2C space, or related to this, like environmental projects such as green energy: the crowd is “connected” to  “green energy”, or that great new consumer product. Some of these businesses are not suitable for Venture Capital: it is too small – world domination is too far away – or with an exit horizon that doesn’t suit the Fund’s investment mandate.

Crowd funding also has some aspects that, compared to Venture Capital, needs some further thinking. Respected, and professional VC’s, are known for their business insight, their network and their expertise on specific domains. And the funding power that comes with this to fuel the dreams to bring companies to market leadership. Obviously that comes with a price, because VC’s want to have the best stake for their bug, and they are trained negotiators. In addition, these nosey smart guys have a lot of mind on many topics to run your company faster, smarter, and more focused but then again, they have a world of experience about scaling companies that took that route before you. The price you’ll pay for that is that you need to share more responsibility  and have to convince them frequently about your steps and debate with them. Some entrepreneurs like that, they love to learn from the discussions and advice the VC-guys bring. Crowdfunding does not bring this.

Another aspect that differentiates VC’s from crowdfunding is the access to large amounts of capital  – either from the VC itself or their peers in their network – and the route to an exit. Although most investors – private investors or VC’s –  want to exit where they can actually monetize their investment, for VC’s it is their core business. And therefore they will do everything to get the highest value, and build the company that is renowned as market leader.

So maybe the dilution of your shares when a VC comes in is larger compared to funding through crowdfunding, and probably you will have some deep discussions on your value propositions and positioning, chances are that in the end the return realized with VC money compared with crowdfunding, is higher.

Since crowdfunding is relatively new, only time will tell if this statement is true. Crowdfunding is a great new way of getting access to funding for an entrepreneur, and a great way of getting access to companies if a private investor wants to make some money on the product he endorses. But like with any product and service: both Venture Capital and crowdfunding come with a price.

In the meanwhile I will look at my mailbox and wait if my Head-Up Display arrives.

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