The whole concept of democratising capital is very compelling but does it really work? The UK has led the way in equity based crowdfunding, with firms such as Crowdcube and Seedrs in the forefront of the trend. Now other nations are set to follow, but does it really work? What are the alternatives?
I am a great believer in the idea that platforms change the world. We see this with the likes of Uber and Airbnb. Platforms are great for aggregating the market and reducing the cost to serve. They are very efficient and can grow rapidly through network effect. AngelList has achieved great things in the US as a professional funding platform but has failed to achieve such strong traction in the UK.
I have often observed that VCs don’t exactly eat their own dog food when it comes to building scaleable businesses for themselves. Platforms can change all this and make it possible for investors to engage directly with founders.
However, I would argue that equity crowdfunding has severe limitations. There are simply not enough high quality startups to sustain the existing players. This will lead to compromising acceptance criteria and higher risk for investors. Investors have reduced control in the crowdfunding model and are less likely to have the skills to carry out the same level of due diligence.
Crowdfunding also relies very highly on market hype. The man in the street will only invest in high risk tech if he believes that he is investing in a future unicorn. Once the heat goes out of the market, the stimulus to participate disappears.
Angel Investment is highly technical and only sophisticated investors fully understand the the need to diversify their investment across a broad portfolio limiting overall investment to a small percentage of their overall capital. Investing in one or two startups on a crowdfunding platform will almost certainly result in losing the original capital investment.
Founders love crowdfunding because they believe that they will get a better valuation and access to a broader base of investors. They also get the opportunity to build user base during the fundraising process. However, most platforms recommend that founders bring their own investors before launch. Sophisticated Investors will increasingly refuse to play ball because the process is against their interests. We have seen a couple of high profile founders pull their crowdfunding campaigns due to lack interest from investors. This can be a disaster because it signals failure to the whole market.
So what’s the choice?
Professional funding platforms such as Dreamstake provide certain advantages to investors and founders;
We work with the founders over many months to get to know them, providing support through Dreamstake Academy and other activities. This allows us to conduct proper due diligence.
We have built a database of qualified investors and a high understanding of their investment preferences
We provide tools such as a dealroom to help investors build the round
We match deal flow through to the most appropriate investors and therefore increase the chances of success
We allow lead investors to set the term-sheet and negotiate the valuation
Professional funding platforms offer many of the same advantages of crowdfunding platforms. They aggregate both investor and startup databases and matchmake to increase the probability of closing the round. They deploy the experience of sophisticated investors to carry out due diligence and ensure that terms are balanced. Only time will tell whether crowdfunding becomes the norm. Angel and VC represent a tiny percentage of the overall investment market. This is largely determined by the number of investment opportunities. I would rather see innovative ways for institutions to deploy capital into venture than open up investment to investors who are going to get burnt.
Blog by Paul Dowling — Co-Founder of Dreamstake the world’s first tech startup platform to match over 16,000 founders with the most appropriate investors using a unique startup rating system. This allows entrepreneurs and investors to monitor startup progress and inject capital and support when most needed. Startup founders create profiles on the platform and get curated introductions to investors. We are constantly looking for great early stage tech startups. Investors please contact firstname.lastname@example.org