Crowdfunding Should Be Used as a Last Resort

I recently wrote a commentary piece for the Dallas Business Journal regarding equity crowdfunding titled:  “Here’s Why Crowdfunding Should Be Your Last Resort”  I thought some of my readers would enjoy it. Some of the main take-homes from the article are:

(1) It may not provide the boon of capital some predict

Even if a startup is willing to submit to equity crowdfunding’s increased regulation and incur its significant transaction costs, non-accredited investors may not collectively be the untapped well of investment capital that hopeful startups eagerly anticipate. A lot of attention has recently been given to the top 1% and their share of U.S. wealth, and accredited investors are said to represent about the top 5%.

While the inclusion of non-accredited investors may increase the investor pool by a factor of 20x, the increase in available wealth may not even double, even though any increase would be welcomed by startups. Further, it is likely that the typical non-accredited investor may not have a portion – or any – of his or her wealth readily available or otherwise earmarked for high-risk investments in startup companies.

(2) It May Signal Your Startup has already been passed over

Crowdfunding, at least for the time being under current and proposed regulations, will be less appealing to startups than typical angel or venture capital investment.Those companies that engage in equity crowdfunding may unknowingly signal that they have been passed over for investment by such angel and venture capital funds, leaving the equity crowdfunding companies to represent their leftovers.

Even companies with successful campaigns will be presented with challenges from obtaining routine consents to shepherding hundreds or even thousands of investors through subsequent financing rounds, as raising capital is typically not a one-time event for a startup.

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Conclusion

Please know that I *want* equity crowdfunding to be a boon for startups, I just can’t recommend it as a go-to option today.  And, please realize I distinguish this from “rewards-based crowdfunding” which I do believe can be a positive for a startup at this point.

 

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One thought on “Crowdfunding Should Be Used as a Last Resort

  1. Thanks Ryan, that’s an incredibly insightful look into the legalities of equity crowdfunding. I wrote a piece last year from the founder’s perspective on 9 reasons why not to equity crowdfund for your startup, which I think your readers would also find interesting.

    http://bit.ly/1Dkmwp6

    Thanks,
    Ali Ahmed

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