The democratization of capital is changing how startups raise money. You must pay attention or your competitors will pass you by. 2016 is the turning point! According to estimates from Massolution, crowdfunding will soon overtake venture capital.
This shift from VC money will only continue. VC funds have been around since the early 1950s - for almost a 70-year run. It is an antiquated way of getting capital. In less than 15 years, crowdfunding platforms have become a much better solution.
Based on my experience with both worlds (VC and crowdfunding) while launching my own startup and helping other startups grow, here are five reasons crowdfunding will soon crush VC money:
1. It is fast and fluid
Crowdfunding allows you to raise money whenever you are ready. It is fast. It took under 90 days to launch our Kickstarter for Perfect Burpee. We decided to use Kickstarter in December and by mid January, we already had our campaign up and running. A little over 30 days later, we had enough money to order our mats from our overseas manufacturer.
Beyond being fast, crowdfunding is fluid. You can launch whenever you want. You do not have to wait for pompous people like VC partners to get you on their calendar or for anyone else to make a decision.
2. It provides instant validation
You are able to immediately determine whether your product is viable at the end of a crowdfunding campaign. Silicon Valley startups often get caught up in the ‘raising money’ game. Then, when they get a VC to back them, they start believing they have validation. If that were true, most VC funded companies would turn a profit. This is NOT the case! Three out of four VC-funded companies fail. And sometimes, entire VC funds fail because the partners make too many bad picks.
3. You can keep your company
If you are building a scalable business, equity is a scarce commodity. You have to share it with partners, advisors, and employees. That leaves very little for you. Every time you seek money from investors, your piece of the pie shrinks. With crowdfunding, in most forms, you keep your company. There are, of course, a few exceptions like equity crowdfunding. Yet, even equity crowdfunding has benefits over VC funding because it enables you to build an army of supporters who can help you grow your company.
4. It costs less money
It is expensive for institutional investment firms or traditional venture capitalists to operate. They have to pay for staff, investment brokers, office space, and marketing. All that is even more expensive since people like to overcharge VCs, since they are known to have money.
The business of raising money can be expensive since wealthy people like to be wined and dined. All these expenses are pushed to the entrepreneur in the form of lower valuations, fees, and otherwise onerous terms. In contrast, the only overhead for crowdfunding is the percentage given to the platform. This dollar amount is transparent and easy to predict.
5. VCs can be jerks
VCs receive hundreds or thousands of proposals per month and most are unqualified or bad fit. It is easy to understand how they have built defense mechanisms and act to protect their time. With crowdfunding, you can skip the personalities and get funding directly.
Given all the facts, it is clear that crowdfunding will continue to grow and is a ‘must know’ for today’s entrepreneurs. However, institutional investors still have value in certain situations. If you have a B2B business model or need strategic relationships, VCs may be the best option.
What funding model has been most effective for your business?