Equity Crowd-Funding

As an investor, I come across several people seeking to get funding for their ideas or business.  Some of them have already sought funding through crowd-funding portals such as Kickstarter or Indiegogo without having to give up equity in the company but are still in need of additional funds.  Others have grown organically and are generating revenue but are also in need of additional funding in order to take their business to the next level.  

However, not all of these great ideas and/or business concepts will get funded through traditional means of investing such as venture capital or an angel investor.  The reason being is simple.   Investors in startups acknowledges the risk involved and the low probability of success.  In order to mitigate the risk, the investor has to mitigate it in two ways.  First, diversify the investment portfolio by planting the seed in several different kinds of startups.  There is no way of knowing for sure which ones will flop, which ones will get sold to Google, and which ones will become the next Google.  

Second, make sure that there are enough influx of cash to capture market share and/or to keep the traction alive.  To the second point, it is the difference between an indie film and a Hollywood film.  Certainly one is not necessarily better than the other, but the films made in Hollywood have the marketing dollars to reach out to the vast majority of audiences.  This same principle applies to startups.  

Also given the high degree of risk, the investments has to yield a high degree of reward.  Sure, there are businesses that never breaks above a $100K in revenue but still manages to survive for a long periods of time. However, where would the return on investment be when hundreds of millions of dollars has been invested in a portfolio of successes and failures.  For venture capitalists and angel investors alike the successful company has to yield enough return to cover the losses of the failed ones.  So, where can these businesses with a decent idea that may not generate astronomical returns go for funding? The answer to this conundrum can be found through equity crowd-funding.  

Equity Crowd-Funding portals can be both a blessing and disruption to VCs and angel investors.  There are ideas out there that are too far fetched and possibly born way before its time that gets easily passed up.  These ideas gets passed up because there are no relative comparable to assess the risk of the enterprise.  There are other ideas where the management team is too inexperienced and untested to just write a check.   The risk here is that they may present an idea that looks good on paper but may not be able to fulfill on the promise of making it possible.  For example, a great medical technology that promises to replace the harmful radiation of x-rays.  

What equity crowdfunding can do for VCs and Angels, me included is to screen out the bad from the good.  It also allows an unproven entrepreneur to showcase his or her capabilities to bigger investors.  For the equity crowdfunders, the loss from investing in such enterprise will not be so bad due to the small amounts of money that an individual is investing.  The best outcome for crowdfunders should be to limit the total pot of money to the amount they feel comfortable donating without getting anything in return.  Otherwise, it would be no different than playing the odds at Vegas.  

Personally, I am for crowdfunding and crowdfunding for the little guys who can only invest a couple of grand.  I also understand the opportunity cost this will cause for a traditional investor of this space, especially if the very successful enterprise gets enough money through crowd source and does not need it from us.  But overall, entrepreneurship is the new revolution and how big or small the enterprise, they all need a fighting chance.