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Crowdfunding Fills a Gap

Published June 29, 2012 at 4:33 pm

Guest Article by Kevin Hitchen, founder, Localstake.com

(c) Crestock

Like it or not, the crowd is good for VCs and angels. Many big name investors fear the prospect of messy cap tables and unsophisticated investors ruining deals, but there are some VCs who get it: crowdfunding is here, so embrace it and take advantage of the opportunity it presents. Here’s why:

Crowdfunding opens up time for VCs to focus on what matters to them

Simply put, there is much more demand for capital than the amount supplied by VCs and angels. This means VCs drink from a firehose of deals coming at them. They have to come up with sniff tests, ruling out businesses right away just so they can manage the amount of deals. Crowdfunding is a more scalable model that can handle the excessive deal flow, freeing up time for VCs to focus on the businesses that are in their wheelhouse.

Crowdfunding acts as a deal pipeline for VCs and angels

VCs usually are focused on ‘hockey stick’ growth opportunities. They’re usually on the hook with their own investors to keep up with return expectations, so they have to find businesses who can meet those targets. This limits the business growth stages they can support. Crowdfunding acts as a conduit for businesses currently outside of VCs’ scope. They can send those deals to a crowdfunding platform, watch the seed grow and gain validation, and get back in the deal at the right time for them!

Many of the businesses crowdfunders will invest in don’t need VCs.

Crowdfunding can support any industry and any type of business. It can support the high-growth industries that VCs play in, and it can support more mature growth industries. With crowdfunding, businesses are not only raising capital, they’re advertising to their end consumers at the same time. This results in a much broader impact than any one VC would have.

The worry about having a messy cap table is overblown

Many businesses that VCs currently evaluate have messy cap tables and organizational docs as it is. Crowdfunding is not creating a new problem when it comes to the organizational skills of entrepreneurs. In fact, the technology utilized by crowdfunding intermediaries can actually improve the quality of documents VCs review by implementing standardization. Good crowdfunding intermediaries should understand the mechanics of a company’s cap table and structure the investment in a manner that does not compromise subsequent financing, if that is a possibility. All in all, crowdfunding can make a VCs job easier when evaluating investment opportunities.

Some VCs and angels have voiced an opposition to crowdfunding, but they’ll learn to love it. More capital = more successful businesses. Get ready.

Kevin Hitchen worked in institutional investment management and due diligence at the Indiana Public Retirement System.  Indianapolis-based Localstake, LLC operates online, locally focused marketplaces that connect businesses looking for capital to local investors and community partners. The opinions expressed here are those of Mr. Hichen and does not reflect any formal policy position of CFIRA.

Feature image (c) Crestock

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