One of the oft-repeated concerns among professional investors about crowdfunding is that abundance ruins markets, or more precisely, that too much money chasing too few worthy business opportunities hurts everybody. Herd-style investing, chasing the next hot venture, weakened investor protections, inflated business valuations, and more will depress returns to investors and spoil private equity in general.
Will crowdfunding upset the private equity apple cart? Might a tsunami of new money flood the world of early stage businesses ? We won’t know for sure until some time after the SEC issues crowdfunding rules in early 2013, but it might be instructive to see what some prominent investors are saying before the crowdfunding effect is felt.
Kevin Hartz makes a scarcity-of-resources argument in Wired to explain his withdrawal from angel investing, stating that there are simply too few businesses to match with too many investors. Awash in cash, the newly funded businesses are starving for for software engineers, service providers, and real estate . Fierce competition for resources drives ever higher prices, and the sad end of this movie has a familiar feel to it.
Fred Wilson of Union Square Ventures notes the poor returns of venture capital investing and claims that the industry would benefit by shrinking its asset base . . . by half. In lieu of radical weight-loss, he says,
If these crowdfunding markets really do develop into these vibrant markets… maybe the answer is to leverage that capital and do something interesting there as opposed to going out and raising money from the institutions. A possible model could be a scenario in which a VC spots an interesting deal in the crowfunding market and offers to sponsor the deal with one-tenth of a $1 million round, he said, potentially making it easier for the startup to raise the remaining $900,000. The hypothetical VC could also join the board and get added equity for the expertise.
It seems that the future of angel and venture capital investing is primed for change due to crowdfunding, but much of the new world order remains unknown. To echo the old Chinese curse, “may you live in interesting times.”