Is Kickstarter the new VC?
In June, The Economist reported that Pebble, a customizable watch that displays smartphone messages, had raised $10.3m. That, in itself, isn’t noteworthy. What is, however, was the way Pebble raised the money — not from venture capitalists or private equity firms, but from 68,929 ordinary people using the crowdfunding platform Kickstarter.
It was yet another milestone for crowdfunding, which started out as a way for charities and creatives to raise cash. Individuals would pledge money for a project in return for ‘rewards’ – credit in an indie film, or, in Pebble’s case, a free watch.
That model has quickly evolved and has started to attract entrepreneurs and small businesses in search of growth capital. With banks increasingly unwilling to lend — and less trusted by small and medium-sized enterprises – the market for crowdfunded finance is only likely to grow.
Research from Massolution estimates there will be $2.8bn raised by the end of 2012 and there are already some 450 platforms globally, with lending-based funds particularly active.
The big challenge now is regulation. There are plenty of peer-to-peer lenders, but most have so far avoided equity-based models in order to steer clear of regulation that requires investors to be ‘sophisticated’ (or ‘professional’).
But does it compare with VC lending? According to the BVCA, the UK trade body representing venture capital and private equity houses, VCs in Europe have been moving away from seed and start-up deals for a number of years to larger, less risky deals. (It’s the crowdfunding platforms themselves that have piqued the attention of VCs.)
How does crowdfunding stack up against VC investment? Here are some benefits:
- Social proof: Arguably, ideas aren’t as rigorously vetted by the crowd. But crowdfunding is a better form of ‘social proof’ – if you can convince the crowd of your venture, it suggests there is a market for it.
- Visibility: As entrepreneur Tom Serres says, crowdfunding is valuable in bringing “the product and the market together for investors to see.” Online visibility attracts a wider investment pool of potential customers.
- No dilution: At the moment, there’s more appetite for lending without strings – for no loss of equity.
- No interference: There’s less pressure to exit – a mixed blessing, as exits can provide a focal point and more allowance for slower, but more measured growth.
Here’s what you miss out on:
- Board expertise: Small firms that want a board member and an expert won’t find this via the current crop of platforms – but who knows what the model will evolve into?
- Connections: You don’t get the enthusiasm of the angel investor, nor the institutional support and networking connections of the VC.
- Financial credibility: Equity-backed businesses are more likely to win the trust of the bank manager.
- Scalability: VCs can help a business scale up fast. But Pebble’s story indicates crowdfunding’s catching up.
If you don’t want advice, just cash, crowfunding is a godsend. As platforms grow closer to investment firms, they may yet start to edge the VC out of the way.
Effectively, the crowdfunding model is unlikely to replace VCs in the short-term, but should act as a proving ground for fledgling companies or individuals with ideas. If they survive on crowdfunded capital, they may start to attract the VCs.
Longer term, though, will regulation make it possible for individual, unsophisticated investors to hold onto stock in companies they’ve helped to grow?
Joanna Higgins on August 13, 2012