Crowdfunding: Threat or Opportunity for Venture Capitalists and Angel Investors?


By Simon Erblich, Founder of First Line Capital

When equity-based Crowdfund investing first came on the scene earlier this year, there was talk of how it might possibly “crowd out” venture capitalists. While historically venture capital firms and angel investors have been the dominant force in early stage financing for startups, Crowdfund investing, legalized by this year’s JOBS Act, is yet another funding mechanism that will bring a whole new class of investors into the capital markets. Under the law, entrepreneurs will now be able to raise capital via Crowdfund investing (CFI) up to $1 million annually, and unaccredited investors may invest up to $2,000 of their own money in these new ventures.

The early skepticism of and apprehension about Crowdfunding seems to be subsiding in VC circles, but that does not mean traditional firms have nothing to worry about. In recent years, VC firms have been criticized for lackluster performance, with only half of funded startups yielding a return, and although $30 billion has gone into venture-backed companies in the U.S. this year, venture capital investments have not outperformed the equity markets in more than a decade. Since 1997, less cash has been returned to investors than has been invested in venture capital. These figures suggest to industry insiders that the current model is broken, despite high-profile tech successes like Facebook, LinkedIn, Zynga, and a few others.

The appeal of venture capital firms and angel investors for many entrepreneurs is not only the funding they provide, but the business expertise and expansive insider networks they can leverage. However, with increasing competition from incubators/accelerators and now equity-based Crowdfund investing, some feel uncertain about the future of traditional VC and angel investing. The fact is that the startup ecosystem is changing due to major competition. All this raises the question: will Crowdfunding be a direct competitor with venture capital and angel investors?

In short, the answer is: not necessarily. Though both traditional VC and Crowdfund investing are mechanisms for raising investment capital, there are key differences that make both funding avenues viable and important in the long run. Additionally, venture capitalists may be able to take advantage of Crowdfund investing to diversify their portfolios or identify promising startups for future rounds of funding.

Publicly, some pundits talked about traditional VC being threatened by Crowdfunding, but privately, expert venture capitalists expressed excitement about the benefits of CFI to the venture capital community. In fact, some of the premier VC firms in the U.S. invested more than $6 million into Crowdfunding platform Funder’s Club recently, while other VC’s are looking to launch their own Crowdfunding websites. IPO Village is another such startup, which offers NASDAQ IPOs from investment banking firm First Line Capital directly to the public, finally allowing the everyday “Joe” investor to get in on the ground floor of new IPO investment opportunities once only reserved for “exclusive institutions and sophisticated investors”.

In fact, the company’s first Crowdfunded IPO offering has already garnered more than $1 million in pledges online. The company employs a “first-come-first-served” policy, with investors already active on the site. IPO Village can accept investments from accredited and non-accredited investors alike and does not need to wait for the JOBS Act since their offerings are all publicly registered and open to everyone, as with every traditional IPO. In IPO Village’s case, crowdfunding is simply being utilized to conduct more time efficient and cost effective initial public offerings for individual companies and/or Venture firms managing their portfolio company’s IPO.

Venture capital firms and angels provide much more than funding to startups through guidance with business plans, introductions to key industry players and to professionals with a wide range of expertise. Crowdfunding is merely another funding mechanism for industry players to utilize in taking their startups public. Crowdfunding will be beneficial to VC’s and their startups in a number of ways, including allowing them to:

  • Maintain control over the valuation of their companies
  • Manage the timeline, strategy and planning for when their companies should go public
  • Manage share buying limits so that stock ownership is efficiently structured
  • Effectively plan their startups’ exit strategies
  • Bing their own network to crowdfund their portfolio company

Additionally, since the tradition IPO process is usually more costly, with typical costs for going public ranging from $250,000 to as high as millions of dollars, Crowdfunding delivers a low cost alternative for certain companies wanting to go public. As such, VC’s can now use Crowdfund investing for IPOs, as well as for other offerings, as a complementary expansion to their current services by adding it as a new cost-effective tool in their financing arsenal. Crowdfund investing will not replace funding from VC and angel investors, due to the capital raising limits, but it can help the industry improve its batting average by allowing the public to thoroughly vet and invest in innovative ideas.

  • Faye

    Excellent article!