The Fallacy Against Crowdfunding – The Age of Metapreneurship
Crowdfunding – The Calm Before the Storm
January 23, 2012

The Fallacy Against Crowdfunding

Recently (the website for Entrepreneur Magazine) posted an opinion piece called: Why Crowdfunding is Bad for Business I encourage you to read the article in full. But I must say, I found the argument misinformed, to be kind. More bluntly – the argument and article were condescending, amateurish, and uninformed. Let me address some of the many disputable points:

Startups don’t just need money — they need expertise.

Maybe. Sometimes. Not always. Regardless, what does that have to do with the price of milk? Is there some unwritten law that says a startup must get their expertise and money in the same package? Startups also need talent. Should there be a requirement that funding also be accompanied by 200 hours of work by the investor? Oh, and the implication that because someone is an investor means they are also an expert is ludicrous. Sure many investors are former executives and entrepreneurs and many are all around smart people. But just as many are merely ‘investors’ – investing money because of a belief in a market or in an entrepreneur (or because they are following the lead of other investors). In fact, as someone who sees dozens of real life examples of entrepreneurs, ventures and investors hands-on, each week, I can tell you that the number of “uninformed” (and I am being kind) Angel investors and Venture Capitalists is vast. Unfortunately most of the time, the person who has the money, tends to think they got the money because they are smart or because they know how to be an entrepreneur. I don’t mean to be especially cynical about the intelligence level of investors of any kind – I am just challenging the notion that 1) Investors bring expertise to the table, and 2) Investors bring more expertise than the entrepreneur has or needs. Sometimes it’s true. Sometimes not. It is irrelevant to the argument for or against Crowdfunding.

But in a crowdsourced model, no one investor has substantial money in the venture. So there’s no one who could insist on a board seat as part of their deal, or otherwise make an entrepreneur take their ideas seriously for how to grow the business.

Where do I begin? First. So what? Second – Google and Microsoft have tends of thousands of investors – and very few can insist on a board seat, or “make” the entrepreneur take their ideas seriously. Hmmm. So a board seat, or owning a major portion of the stock gives false weight to ideas being taken seriously. The above statement implies that public companies – with thousands of shareholders are also “bad for business”

.. that makes the startup a riskier venture

 Really? Why? Because of the assertion that every investor needs to have their ideas vetted by the company? Since when is this the purpose of being an investor, or a role or a right of an investor? Investors bet on good ideas by finding companies that share their ideas (or have better ones) and support those ideas (and get them taken seriously) by investing in them.

Crowdsourced funding sites thrive on successes — being able to state the high rate of return for investors. Would a business-oriented crowdfunding site be able to make a good claim here? Perhaps, but I’m betting no.

With all due respect to the author of this piece: Equity Crowdfunding is not yet legal in the US, so there are NO success stories yet. Thus, the author’s bet that there are no success stories is a good one. It’s also a manipulative and absurd strawman argument, much like, “A Women for a US President would be awful for America; can you name ONE successful female US President? I’m betting no.” Do I need to point out how absurd this logic is? Again, there are no equity crowdfunding sites in the US, thus no success stories. The “crowdsourced funding” sites the author is referring to are the likes of Kickstarter and IndieGoGo – which are donation-style sites that fund projects not companies. Back to reality:

  1. The majority of promising tech companies these days need less (initial) funding that their predecessors because technology and launch is much cheaper and more efficient than in prior decades. They need less money to start. $50,000 versus $500,000 or $5 million a decade or two ago, This makes these startups less attractive to institutional investors (VCs) and other professional investor classes – for many reasons which I am sure are beyond the understanding or experience of the author of that article. For a company raising $50k from 500 investors, each with $100 investment – how is this putting the investor at risk? OK How about 50 investors at $1,000?
  2. Please don’t confuse “Accredited Investor” or “Savvy Investor” with being smart. It means they are either good at buying and selling stock, or it means they have enough money that it won’t matter if they are smart or not. A software engineer working at Google (or any Silicon Valley style tech company) probably has more technical savvy to know whether or not fledgling tech startup has a unique and credible technology than George Soros or Warren Buffett.
  3.  The latest Economic data (and long term studies) have identified scalable startups (not just small businesses or new businesses) as the driver of the US economy and job growth – the “gazelles” as economists are calling these companies. How can increasing the opportunity to fund these new companies be “bad for business”?

Ironically, the author never mentions the one argument against Equity Crowdfunding that most (including opponents in Congress) cite most often as to why Crowdfunding should not be legal: That investors could be taken advantage of, or scammed. This has some validity. Then again, if Congress is truly interested in protecting the “masses” from losing $100 or $1,000 investing in the next Google or Facebook – then where is Congress in protecting these same people from “investing” that same $100 or $1,000 in lottery tickets, Las Vegas, Atlantic City? Or from investing in dubious political campagins, for that matter.

There are indeed millions of successful companies crowdfunded by groups of unaccredited investors – they just haven’t occurred via the web, and the “crowd” has been limited to 35 investors or fewer. This method of crowdfunding is called “Friends and Family” – and has worked spectacularly for millions of startups for decades. And to address the author of the Entrepreneur opinion piece, just how much expertise did Jeff Bezo’s parents bring to the table when they invested in Jeff’s new company, Crowdfunding is emerging as a powerful new way of fueling nascent innovative startups, while allowing the non-professional investor to have a piece of that glory (if not the financial returns). There may be many arguments against Equity Crowdfunding, but so far, none of those arguments have any real credibility or logic behind them – least of all the article from “Entrepreneur” magazine.

1 Comment

  1. Quora says:

    Can a US-based tech startup use Crowdcube to raise investment?…

    As of today (March 19th, 2012) EQUITY Crowdfunding is not yet legal in the US. But let’s define our terms. Right now, most small companies in the US seeking raising funding in return for equity (stock/shares) fall under SEC Regulation D Rule 505 which…

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