The crowd was buzzing at Stanford’s Li Ka Shing Center last Tuesday evening. The Stanford VLab panel on crowdfunding was sold out, and I was honored to be one of the panelists speaking to the packed house. The other panelists were:
- Carl Esposito, founder of crowdsourcing.org, moderated the panel with skill and finesse. He kept the conversation moving briskly and maintained a balance among opposing opinions.
- Slava Rubin, CEO of Indiegogo, argued passionately to open startup equity investment to all comers. Slava has just received $15 million in funding from Khosla Ventures.
- Daniel Zimmerman, Partner at WilmerHale, provided a balanced explanation of the many legal implications.
- Ryan Caldbeck, CEO of CircleUp, had an interesting perspective based on crowdfunding for companies with proven business models. Sixty days ago, Ryan launched an equity-based crowdfunding platform (for accredited investors) that focuses on consumer product businesses with at least $1 million in annual revenues. The consumer products market segment (including food) is underserved by the venture capital community.
From left to right: Slava Rubin, Ryan Caldbeck, Don Ross, Daniel Zimmerman
Definition of terms became critically important:
- “Project-based,” also called “rewards-based,” crowdfunding is great. People provide funding in exchange for discounted products/services. This is what Indiegogo and Kickstarter are doing currently. See my prior post for the success of Pebble Technologies at Kickstarter.
- “Equity-base” crowdfunding, as envisioned by the JOBS Act, is fraught with problems. When it takes effect, people would provide funding in exchange for company equity.
Because little information is available on “equity-based” crowdfunding in the marketplace, crowdfunding discussions tend to conflate “rewards-based” and “equity-based” crowdfunding. This is a mistake—they are very different animals. On the panel, I pushed for understanding the differences.
Another important distinction is company stage. My focus is the raw startup that needs seed or Series A funding. This is the domain of Angel investors and some venture firms. Information about a company is always incomplete—much is unknown and unknowable at this stage. For early stage investments, good diligence, research, experience, and judgment is needed. Research by the Kaufmann Foundation shows that positive Angel investment returns are related directly to:
- Depth of due diligence
- Domain knowledge
- Mentoring, coaching and participation
Equity-based crowdfunding proponents suggest that the “wisdom of crowds” will outperform Angels and VCs. But in the financial markets, crowds have been anything but wise. “Herd mentality” and “group think” have emerged time and time again—from the Tulip Mania in the 1600s, to the dot.com bubble in 2000, to other recent financial crises. For the Harvard Business Review, Daniel Isenberg has written an excellent blog, The Road to Crowdfunding Hell, that describes how “crowds are frequently stupid” when it comes to the financial market.
It is hard, very hard, for seed stage companies to become successful. Mentoring and coaching from early investors can make the difference, but these are not part of the proposed equity-crowdfunding. Also, it can be years or decades before you know whether a startup investment is successful. Will equity-based crowd funding produce better investment returns than Angel/VC funding? In an “apples-to-apples” comparison of early stage companies receiving funding, the evidence says “no.”