With all the conversation about the perspective of the venture capital industry on the nascent crowdfunding space, it is becoming clear that VCs will be increasingly welcoming platforms that facilitate funding for emerging companies. Stop and think about it. Seed financing has the highest level of failure. The VCs and to some extent the angel community has played that role by providing pre-concept enterprises a bit of juice to test the waters. And as we know, the VCs get refunded based on their performance and/or long term reputational capital. So imagine an environ that enables seed stage companies access to capital provided, not by the VCs but rather the crowd.
Let the VCs enjoy proof of concept on someone else’s dime, and when traction is achieved, the larger money comes in with mitigated risk. Based on our data, crowdfunding is proving to be a blessing for VC dealflow. And with the Oculus and SmartThings acquisitions (both Kickstarter funded), VCs who aren’t upto their eyeballs in “proprietary dealflow” should probably be paying attention to crowdfunding platforms.
Here’s some other perspectives on VC and crowdfunding based on our recent crowdfunding report which may be worth a look: NY Times – Crowdfunding and Venture Funding: More Alike Than You Think BusinessWeek – How Kickstarter turned into a VC’s best friend Bloomberg – How VCs use Kickstart to kick the tires on hardware startups The Verge – After auditioning on Kickstarter, hardware startups raise hundreds of millions of dollars This is an absolute boon to the venture industry that has sucked wind for many years during the early part of the 21st century.
Read the Kaufman Foundation reports on venture investing, and the difficulties in producing alpha. Well, we are witnessing the best of all worlds for the venture industry. They can deploy capital later in the developmental process, so the likelihood of a success is improved. Might the VCs with their funding capacity be moving more into a role of hedge fund managers, limiting earlier enterprise risk, and capturing the fruits more consistently? The call for the John Q Publics to participate in the next Google or Facebook is a welcomed node of financing evolution for the VCs. Skip the early stage risk, let that be funded by either equity or perquisite oriented crowd participants, and then let’s go for the gold after proof of concept, and the resources to build something hopefully of value. One must ask who are the winners and losers in this brave new world. It is becoming quite clear that avoiding the early stage risk, yet still commanding the lion’s share of capital provision and upside at a later time, should improve venture returns, but it seems like we are redefining the term “venture capital”.
With multi-billion dollar funds, the key VCs are deploying tens of millions into portfolio companies at a time of scaling, not proofing up. A beautiful environment for the VCs. Those in the crowd? You have just displaced the VCs in taking the maximum risk, for which you are investing your own funds, while the VCs get paid to take risk receiving management fees and using OPM (other people’s money). While one of the desires of crowdfunding was to enable both capital formation for emerging companies, while also providing the opportunity for John Q to play early. Well, the game seems to be allow access to John Q at the most risky time, only to allow the big money to defer risk taking and step it up later on. Yes, the VCs love crowdfunding.