Is Crowdfunding a Threat to VCs

Much has been written about crowdfunding and the SEC’s highly anticipated rules that will make equity crowdfunding available for non-accredited investors.  Equity crowdfunding involves actually selling stock (i.e., equity) to investors via a crowdfunding portal.  This is vastly different from sites like Kickstarter where the company raising $$ does not offer equity, but rather other perks like a pre-order of a product or product purchase discount.

BTW, a great website for crowdfunding resources and statistics is crowdsourcing.org.  And in particular this infographic is terrific.

I read an article recently in TechCrunch called “Is Equity Crowdfunding a Threat to Venture Capitalists?”  Is has some great analysis.

However, one point that I feel is routinely overlooked in the crowdfunding vs VC debate is this:  a company that equity crowdfunds and gets a whole bunch of non-accredited investors essentially, in my view, takes away its ability to raise VC $$ later.  The reason is that active VCs do not want to deal with throngs of non-accredited investors in the company’s cap table.  There are real liability issues (lots of VCs take board seats), deal issues (corralling SHs is often a painful process for future transactions), and people issues (the more SHs a company has the more likelihood of SH complaints).

My advice is to keep this reality in mind if you plan on utilizing equity crowdfunding once the SEC issues its rules…..whenever that might be!

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s