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This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory

This is anecdotal, but I chatted with a VC for a while at an event and he said their firm will not invest in anyone who did equity crowd funding, on the theory that it signals a weaker company. If they were stronger, they would have raised proper VC. I think the existing VC investment structures hate the idea of crowdfunded VC as it threatens their model, which is personal connections and an old boys (and girls) network which allows more favorable terms for investors, especially for first-time founders. I hope that crowdfunding becomes more normal. Not every idea has to have billion dollar potential, which is what most VC's are looking for.

cstavish 9y ago
Accredited investors/VC (disclaimer: I am neither, but co-founded a VC-backed startup) are often wary of crowd funding because of the idea that with more investors, the more headaches that can occur with additional capital raises. Having a big cap table doesn't make company operations easier. I honestly don't know how valid those viewpoints are, but that's what I've heard.
- seibelj 9y ago
  I don't see why this is an issue though, just promise quarterly updates and clearly state rights on future raises for existing investors. They can follow-on or not. All of these issues can be solved, it's just more excuses. It should be easier to have 100 investors who all agree on everything than 4 investors you have to baby and cajole and manage their whining because they feel entitled to personal service.
  - deleted 9y ago
    [deleted]
  - lumost 9y ago
    That assumes that the company proceeds through successive rounds with an upwards trajectory. If the company falters and takes a down round the initial investors may disagree with the direction or even sue. If the company needs to be recapitalized or restructured under a time crunch, tracking down 100 loosely involved investors and getting them to sign the deal may not be feasible.
    - sharemywin 9y ago
      Probably would have been better to have arbitration instead of lawsuits written into the law. (to make it work not for investors)
- ericb 9y ago
  I believe it. I also know that Realtors aren't too fond of For Sale By Owner houses. I suspect this comes down to a similar effect.
  - seibelj 9y ago
    > I also know that Realtors aren't too fond of For Sale By Owner houses This scares agents because a wide-spread DIY real estate industry kills all of the middlemen (themselves)
    - jethro_tell 9y ago
      This is an interesting conversation to have here really. 'Never ask a barber if he thinks you need a haircut'
      - Applejinx 9y ago
        Yeah, it's kind of 'meta'. Though the interesting thing is, Y Combinator is interested in basic income. That's effectively like crowd-seeding, which makes all the 'cut out the middleman' stuff more practical. If you're expecting 'disruption' and embracing it, and you see disruption coming for your own livelihood, the sophisticated response is to try and find a place for yourself in the new situation, rather than stop things from changing at all. In that light, Y Combinator looking at ways to cut out SV incubators could be prescient. It's like with me: I run a very functional small recording studio as part of my business, and it's well on the way to handling the live recording of traditional bands and their instrumentation. Yet I'm a lot more interested in finding unusual ways to support electronic genres (a strikingly different skillset).
        jethro_tell 9y ago
        It's funny here too, because I would assume that crowd funding would put you on a more conservative path. I like the Idea of taking $100k seed money an building a company that turns a profit. Not one that IPO's and makes us fuck you money, just one that pays back my investors at better than market, and pays my employees. But you're signing up for a lot of work, not a sprint, and that's kinda the antithesis to 'changing the world' without making a profit then going to IPO. I don't want to gamble on something, I want to build something with a less sophisticated valuation model where the revenue plan is clear from the start.
- prostoalex 9y ago
  The way AngelList (and I think FundersClub, too) handle it is to set up an LLC. The investors are then partners in an LLC, not direct shareholders.
  - corford 9y ago
    Seedrs also does it like this.
  - dragonwriter 9y ago
    > The investors are then partners in an LLC Pedantically, "members" not "partners"; an LLC is not a partnership.
nathan_f77 9y ago
> Not every idea has to have billion dollar potential If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would happily join a smaller "lifestyle" company as an employee or cofounder, but I probably wouldn't give them much money. I expect 9 out of 10 of my investments to fail, so I also need to look for those 10x opportunities. On the other hand, if it's just a token amount like a few hundred dollars, then I'll throw some cash at a Kickstarter or whatever. But then you can't say I really invested in anything.
- onion2k 9y ago
  That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.
  - sharemywin 9y ago
    I imagine a 5M company is even more likely to succeed which is on lower end of selling to private equity.
- SomeStupidPoint 9y ago
  Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with. Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big". 2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.) That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing. I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.
FailMore 9y ago
I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so raising money from a large collection of distant angels tends to be a signal that the quality of the company must be low - as they should have tried to raise from high quality individuals first. A company with crowdfunding will have to display stronger metrics than a company with strong angels / VCs. Imagine two companies come to pitch, both are identical in every way. One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in? Even the potential deal flow from those individuals helps hedge your bet. As a side note I think that this relationship of quality and crowdfunding is true (though not always by any means). I have seen fraudulent behaviour by companies misrepresenting their data to a group who are, by a VC's standard, very unsavvy investors. This company was certainly not able to raise money from a VC, but raised two $M+ rounds on a crowd funding site. However, I have also seen good companies who don't have an 'in' to the VC world raise money in this way.
- zebrafish 9y ago
  as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn Exactly the point the parent was making. Those are big time contacts. Somebody outside of the valley now has a chance to get $1MM(!!!!) of seed money for their idea without having to relocate and schmooze and network. I'm as big a proponent of real world social skills as anyone, but this removes a significant barrier to entry for a lot of would be entrepreneurs. Also, wouldn't a large number of crowdfunders indicate a better product-market fit?
  - lettergram 9y ago
    I actually am torn on the subject. I'm not a VC, but I do invest heavily and regularly track various companies. That being said, I recognize my opinion might mean little, but... Product-market fit is definitely a good sign a company is on the right track in terms of product. However, 99% of what makes a company successful is execution. A crowd funded campaign on Kickstarter doesn't need to even be possible[1] or it can be completely silly [2]. It doesn't need to show a 100x growth, nor does it need to exist. On the other hand a VC will do vetting, to make sure the team is right to execute to solve a problem. Let's put it this way: * A VC invests in a team to solve a problem * Crowdfunding invests in a product/idea A VC is a much stronger signal. [1] https://www.kickstarter.com/projects/gnut/kickstarter-open-source-death-star?ref=discovery https://www.kickstarter.com/projects/gnut/kickstarter-open-s... [2] https://www.kickstarter.com/projects/elanlee/exploding-kittens https://www.kickstarter.com/projects/elanlee/exploding-kitte...
yeukhon 9y ago
Another issue is legality. Dispute with thousands of investors vs one or two investors.
riazrizvi 9y ago
Even as a founder I can understand why VCs might be reluctant. Investors accumulate control of a company over each round of funding. This enables them to rest easier that their money isn't going to be mismanaged. The investor-bloc's influence is predicated on the reasonableness of the other investor partners, if they don't see eye to eye then their votes don't have influence. An equity crowd is not a strong partner for the investors. Just the opposite it leaves more control in the hands of the executives because they have the direct communication channel to them.
- rhizome 9y ago
  Historically and empirically, does this VC influence and control result in better-run and more-successful companies?
dangerboysteve 9y ago
I'm on a few email lists from these crowd funding sites and the prospects that get emailed to me are less than stellar.
- seibelj 9y ago
  Totally 100% agree with you. I'm hoping that higher-tier entrepreneurs start to use it, but I don't see this happening
JumpCrisscross 9y ago
Crowdfunding nukes VC's downside protection. VC funds invest through preferred stock or convertible debt for its downside-protection features. If that downside protection comes at the expense of unaccredited investors, the risk that one of them sues or a regulator gets involved on their behalf goes up. That could easily neutralise or even outweigh the benefits of the protection. This isn't limited to crowdfunding, by the way. A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers.
- api 9y ago
  > A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers. Hundreds?!?
  - ryandamm 9y ago
    Doesn't sound impossible to me. I was involved with a company at one point that routinely hit its customers up for small-time investment. Never saw the cap table, but I'm sure it was loooooong. (I originally wrote "doesn't sound crazy," but in fact it sounds totally crazy. Just not impossible.)
brentm 9y ago
> If they were stronger, they would have raised proper VC. I think that is really the most important part. A lot of people sophisticated enough to have their interest peaked by the opportunity probably figure the deals being offered are (more or less) the deals already rejected by traditional and more sophisticated channels. If established but private companies (e.g. Lyft) were doing late stage rounds through this type of a marketplace I think demand would be much greater. The problem is those companies probably don't have a lot to gain by doing it that way. Now my assumption on quality may be wrong but that sentiment seems like an important hump for these marketplaces to get over.

cstavish 9y ago

Accredited investors/VC (disclaimer: I am neither, but co-founded a VC-backed startup) are often wary of crowd funding because of the idea that with more investors, the more headaches that can occur with additional capital raises. Having a big cap table doesn't make company operations easier. I honestly don't know how valid those viewpoints are, but that's what I've heard.

seibelj 9y ago
I don't see why this is an issue though, just promise quarterly updates and clearly state rights on future raises for existing investors. They can follow-on or not. All of these issues can be solved, it's just more excuses. It should be easier to have 100 investors who all agree on everything than 4 investors you have to baby and cajole and manage their whining because they feel entitled to personal service.
- deleted 9y ago
  [deleted]
- lumost 9y ago
  That assumes that the company proceeds through successive rounds with an upwards trajectory. If the company falters and takes a down round the initial investors may disagree with the direction or even sue. If the company needs to be recapitalized or restructured under a time crunch, tracking down 100 loosely involved investors and getting them to sign the deal may not be feasible.
  - sharemywin 9y ago
    Probably would have been better to have arbitration instead of lawsuits written into the law. (to make it work not for investors)
ericb 9y ago
I believe it. I also know that Realtors aren't too fond of For Sale By Owner houses. I suspect this comes down to a similar effect.
- seibelj 9y ago
  > I also know that Realtors aren't too fond of For Sale By Owner houses This scares agents because a wide-spread DIY real estate industry kills all of the middlemen (themselves)
  - jethro_tell 9y ago
    This is an interesting conversation to have here really. 'Never ask a barber if he thinks you need a haircut'
    - Applejinx 9y ago
      Yeah, it's kind of 'meta'. Though the interesting thing is, Y Combinator is interested in basic income. That's effectively like crowd-seeding, which makes all the 'cut out the middleman' stuff more practical. If you're expecting 'disruption' and embracing it, and you see disruption coming for your own livelihood, the sophisticated response is to try and find a place for yourself in the new situation, rather than stop things from changing at all. In that light, Y Combinator looking at ways to cut out SV incubators could be prescient. It's like with me: I run a very functional small recording studio as part of my business, and it's well on the way to handling the live recording of traditional bands and their instrumentation. Yet I'm a lot more interested in finding unusual ways to support electronic genres (a strikingly different skillset).
      - jethro_tell 9y ago
        It's funny here too, because I would assume that crowd funding would put you on a more conservative path. I like the Idea of taking $100k seed money an building a company that turns a profit. Not one that IPO's and makes us fuck you money, just one that pays back my investors at better than market, and pays my employees. But you're signing up for a lot of work, not a sprint, and that's kinda the antithesis to 'changing the world' without making a profit then going to IPO. I don't want to gamble on something, I want to build something with a less sophisticated valuation model where the revenue plan is clear from the start.
prostoalex 9y ago
The way AngelList (and I think FundersClub, too) handle it is to set up an LLC. The investors are then partners in an LLC, not direct shareholders.
- corford 9y ago
  Seedrs also does it like this.
- dragonwriter 9y ago
  > The investors are then partners in an LLC Pedantically, "members" not "partners"; an LLC is not a partnership.

nathan_f77 9y ago

> Not every idea has to have billion dollar potential If I'm going to seriously join a crowdfunding investment, I'm going to be thinking like a VC. I would happily join a smaller "lifestyle" company as an employee or cofounder, but I probably wouldn't give them much money. I expect 9 out of 10 of my investments to fail, so I also need to look for those 10x opportunities. On the other hand, if it's just a token amount like a few hundred dollars, then I'll throw some cash at a Kickstarter or whatever. But then you can't say I really invested in anything.

onion2k 9y ago
That just means you should be looking for more equity when you invest in a smaller business. If you get 10* the equity you can achieve the same investment outcome with 1/10th the exit value, and a $100m exit is a lot more likely than a $1bn exit.
- sharemywin 9y ago
  I imagine a 5M company is even more likely to succeed which is on lower end of selling to private equity.
SomeStupidPoint 9y ago
Let's say you invest $500/yr at $50 a pop in local businesses, as part of a club. This seems like an amount of money you might be okay essentially gambling with. Let's imagine that fund spans a moderate size metro (2mil people) and 0.1% of people are willing to join once it gets "big". 2000 people by $500 is $1mil a year. If you figure seed money is $20-100k for a small business, you're creating 10-50 small businesses a year in your local area. (Possibly more once you're good at it and can leverage SBA and venture resources to help match your capital.) That's not a ton, and would definitely work better if you could nudge participation up to 1% or raise the average funding amount (or get another funding stream, or tax breaks, etc), but I think generating that local entrepreneurial churn can only be a good thing. I'd pay $50/mo to see several new businesses a year get started around town, just for the added cultural value small businesses bring.

FailMore 9y ago

I was a VC. I think it is mainly that it is a very weak signal. A good VC or a select group of high quality angels does help a company get itself in order, so raising money from a large collection of distant angels tends to be a signal that the quality of the company must be low - as they should have tried to raise from high quality individuals first. A company with crowdfunding will have to display stronger metrics than a company with strong angels / VCs. Imagine two companies come to pitch, both are identical in every way. One has crowdfunded a $1M seed, the other got a check from Andreessen Horowitz and the CTO of LinkedIn. Which one do you put your money in? Even the potential deal flow from those individuals helps hedge your bet. As a side note I think that this relationship of quality and crowdfunding is true (though not always by any means). I have seen fraudulent behaviour by companies misrepresenting their data to a group who are, by a VC's standard, very unsavvy investors. This company was certainly not able to raise money from a VC, but raised two $M+ rounds on a crowd funding site. However, I have also seen good companies who don't have an 'in' to the VC world raise money in this way.

zebrafish 9y ago
as they should have tried to raise from high quality individuals first.....got a check from Andreessen Horowitz and the CTO of LinkedIn Exactly the point the parent was making. Those are big time contacts. Somebody outside of the valley now has a chance to get $1MM(!!!!) of seed money for their idea without having to relocate and schmooze and network. I'm as big a proponent of real world social skills as anyone, but this removes a significant barrier to entry for a lot of would be entrepreneurs. Also, wouldn't a large number of crowdfunders indicate a better product-market fit?
- lettergram 9y ago
  I actually am torn on the subject. I'm not a VC, but I do invest heavily and regularly track various companies. That being said, I recognize my opinion might mean little, but... Product-market fit is definitely a good sign a company is on the right track in terms of product. However, 99% of what makes a company successful is execution. A crowd funded campaign on Kickstarter doesn't need to even be possible[1] or it can be completely silly [2]. It doesn't need to show a 100x growth, nor does it need to exist. On the other hand a VC will do vetting, to make sure the team is right to execute to solve a problem. Let's put it this way: * A VC invests in a team to solve a problem * Crowdfunding invests in a product/idea A VC is a much stronger signal. [1] https://www.kickstarter.com/projects/gnut/kickstarter-open-source-death-star?ref=discovery https://www.kickstarter.com/projects/gnut/kickstarter-open-s... [2] https://www.kickstarter.com/projects/elanlee/exploding-kittens https://www.kickstarter.com/projects/elanlee/exploding-kitte...

yeukhon 9y ago

Another issue is legality. Dispute with thousands of investors vs one or two investors.

riazrizvi 9y ago

Even as a founder I can understand why VCs might be reluctant. Investors accumulate control of a company over each round of funding. This enables them to rest easier that their money isn't going to be mismanaged. The investor-bloc's influence is predicated on the reasonableness of the other investor partners, if they don't see eye to eye then their votes don't have influence. An equity crowd is not a strong partner for the investors. Just the opposite it leaves more control in the hands of the executives because they have the direct communication channel to them.

rhizome 9y ago
Historically and empirically, does this VC influence and control result in better-run and more-successful companies?

dangerboysteve 9y ago

I'm on a few email lists from these crowd funding sites and the prospects that get emailed to me are less than stellar.

seibelj 9y ago
Totally 100% agree with you. I'm hoping that higher-tier entrepreneurs start to use it, but I don't see this happening

JumpCrisscross 9y ago

Crowdfunding nukes VC's downside protection. VC funds invest through preferred stock or convertible debt for its downside-protection features. If that downside protection comes at the expense of unaccredited investors, the risk that one of them sues or a regulator gets involved on their behalf goes up. That could easily neutralise or even outweigh the benefits of the protection. This isn't limited to crowdfunding, by the way. A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers.

api 9y ago
> A cap table of a hundred $10,000 cheques (I've seen these), even if all are from accredited investors, will have a harder time raising venture capital than one with a handful of early backers. Hundreds?!?
- ryandamm 9y ago
  Doesn't sound impossible to me. I was involved with a company at one point that routinely hit its customers up for small-time investment. Never saw the cap table, but I'm sure it was loooooong. (I originally wrote "doesn't sound crazy," but in fact it sounds totally crazy. Just not impossible.)

brentm 9y ago

> If they were stronger, they would have raised proper VC. I think that is really the most important part. A lot of people sophisticated enough to have their interest peaked by the opportunity probably figure the deals being offered are (more or less) the deals already rejected by traditional and more sophisticated channels. If established but private companies (e.g. Lyft) were doing late stage rounds through this type of a marketplace I think demand would be much greater. The problem is those companies probably don't have a lot to gain by doing it that way. Now my assumption on quality may be wrong but that sentiment seems like an important hump for these marketplaces to get over.