Sramana Mitra wrote a thoughtful Harvard Business Review blog on crowdfunding. She identifies three business segments for crowdfunding.
- First, few businesses are appropriate for venture funding, which requires a large addressable market and high growth potential. Niche business can be great businesses, but horrible venture investments. While these businesses do not have the growth potential required for successful venture investing, they can generate significant cash flow and pay dividends. For many reasons, VCs cannot fund dividend businesses. Crowdfunders can.
- I find the second business segment less convincing—crowdfunding for early ideas. There is a reason that this round is called FFF (friends, family, and FOOLS). Friends and family invest because they know you (there is little else to evaluate) and are betting on you as a person. The Fools don’t even know you.
- The third segment—working capital in smaller amounts, is an interesting idea. This has roots in microlending, which has been a success.
The crowdfunding community has been touting funding successes. Many reports talk about the massive amounts of cash that could be invested in startups. There are two points worth remembering. First, there is a good reason that most accredited investors are not Angel investors—it’s inherently risky. Second, a funding event does not equate to success. Success is an exit and ROI to investors and entrepreneurs. Ask any VC.
Full article here: http://blogs.hbr.org/cs/2013/07/can_crowdfunding_solve_the_sta.html