What is, and is not, crowdfunding

One of the challenges of crowdfunding is explaining what it is, and what it isn’t. Plenty of people get the general idea, but stumble when thinking about how it might work or which types of businesses might benefit from mass micro-investments.

Crowdfunding is not a group of gray-haired, starched-shirt guys sitting around a mahogany table saying things like, “James, this wind farm plan sounds like a splendid idea. Just splendid.” If it requires multi-millions of cap ex, needs rich stiffs to finance it, or displays some perfectly coherent investment thesis, then it might be suitable for  venture capital, banks, etc.

Crowdfunding resembles something like a bunch dreamers, tradesmen, enthusiasts, and real-estate savvy types sitting around coffee when one says to the other, “this neighborhood is growing so fast that if we gut rehab that building and get it zoned for retail on the first floor with work/live condos above it . . . where do we find co-investors to buy the property?” A few real estate businesses, such as FundRise, are already at work in this territory.

Crowdfunding is opportunistic, sometimes messy,  and not “monumental” or “world-changing” in the way the internal combustion engine or  polio vaccine was. It almost certainly won’t be used for financing anything as far-reaching as Amazon.com or as powerful as Google. Those types of businesses have little problem catching the eye of sophisticated angel and VC groups if they need outside investors.

Who has a list of the likely areas in which crowdfunding will take hold? Fire away.

 

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More Skepticism about Crowdfunding

The Wall Street Journal is rapidly establishing itself as home to doubters and critics of crowdfunding legislation, including this post which claims that some angel investors are worried about the influence of “unsophisticated investors” (read: The Walking Dead) on company valuations, followed by the oldie-but-goodie assertion that angels can provide key industry contacts and other support to entrepreneurs.

CrowdFunds dealt with some of this nonsense last week, but it’s worth reiterating two points:

  1. Welcome to a Brave New Investment World. A new market is about to be formed, so get used to it double quick. All the old assumptions about typical metrics, valuations, multipliers, standard industry comps, and accumulated investor experience are about to undergo substantial revisions when the crowd starts investing.  Some of the stuff investors relied upon in the past is going to be obsolete or won’t resemble what it did a year ago.  Company valuations might vacillate wildly for some time until so-called normalcy returns. There might even be a New Normal. The exclusive lock on private equity investments is on life support, dear angel investors and venture capitalists. Time to adapt and compete or move along.
  2. Investors Don’t Babysit. It seems stupendously obvious to say that most private equity investors are seeking high returns in very risky environments.  It seems equally obvious they want to identify outstanding management teams who will help them achieve these returns.  In other words, it’s big boy time with plenty of money on the line.  Babysitting is inefficient. To the extent that investor wisdom, market insights, contacts, and other guidance will aid the business, most investors give those things freely. Some or all of these things might also be found through crowdfunding. These are not mutually exclusive resources for a management team. At any rate, it’s time to sober up the fiction that the angels and vc investors deliver meaningful value, beyond providing capital, to their private equity investments. Sure, it happens–just not often enough to cry foul at the prospect of crowdfunding.
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