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Crowdfunding: Seeing over the crowd

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Charles Sidman reviews the salient success of Crowdfunding to date, and explores some of its remaining uncertainties, risks, and opportunities for improvement.

CHARLES SIDMAN (MBA, PHD)
Managing Partner of ECS Capital Partners and Angels

 

Crowdfunding – which is based on new sets of rules in various countries, and allows entrepreneurial companies to raise funds from a larger number and/or expanded set of participating investors – is alive and flourishing in 2018. In its various forms, it has undoubtedly been beneficial for certain entrepreneurs and their startups. While impactful, the jury is still out on its ultimate benefit to the newly enfranchised or involved investors. From the entrepreneur’s point of view, Crowdfunding has provided a number of significant advantages. Whether fundraising from the historically more privileged Accredited Investor (under some forms of Crowdfunding), or from each and every individual as a potential investor (under other forms), the vastly increased exposure and communication now allowed through internet use has led to markedly greater deal exposure and participation. When done by young companies without substantial financial resources, or by larger companies seeking greater ease and economy in essentially public offerings, Crowdfunding has allowed companies of many sizes to effectively raise funds that would have been difficult or impossible to access previously. Finally, some forms of Crowdfunding have brought consumer market intelligence and sentiment to bear directly on the investment process for certain companies. All of these aspects are innovative and positive from the entrepreneur or fundraiser perspective, as compared to the earlier pre-Crowdfunding world.
 
The picture is decidedly more questionable from the Crowdfunding investor perspective. On the one hand everyone, not only the wealthier elite, now has access to and can support the entrepreneurial endeavor, and participate in its associated financial returns – both of which would appear as positive developments. On the other hand, it has yet to be shown that the full range of quality investment opportunities and outcomes are available for Crowdfunding investors, as opposed to only the more traditional and restricted investors. Many are of the opinion that they are not, for the following several reasons.
 
First, apart from certain classes of companies where user, consumer, or local sentiment plays a large and atypical role in company attractiveness or prospects going forward, many companies using different forms of Crowdfunding are those that have not been successful, for whatever reasons, in more traditional modes of investment fundraising. Operationally, they may thus constitute a second tier of companies deemed less attractive and unlikely to provide comparable investment returns compared with those able to succeed and prosper in the older (non-Crowdfunding) forms of fundraising.
 
Second, the rules associated with non-restricted Crowdfunding-for-all, designed to “protect” the generally less experienced and financially well off from the risks inevitably associated with early stage investing, actually themselves present significant barriers to further rounds of company development and fundraising, and hinder the continuing participation and returns to initial Crowdfunding investors. Hopefully we will see examples in the not-too-distant future of Crowdfunding investors (especially of the open-to-all variety) actually reaping financial returns comparable to those of non-Crowdfunding investors and asset classes. Even with some positive examples, however, it is unlikely that Crowdfunding returns will compare favorably with non- Crowdfunding ones for a long time, if ever. In that case, investor justification for Crowdfunding will have to be from the participation rather than the financial return dimensions – comparable to much of Impact Investing or frank gambling.

From the entrepreneur’s
point of view, Crowdfunding has
provided a number of
significant advantages.

In closing, various forms of Crowdfunding show multi-billion dollar levels of activity per year, and are likely to remain part of our entrepreneurial finance ecosystem for the indefinite future. Clear benefits have been derived, and some of the problems referenced above may be ameliorated by future regulatory changes. Stay tuned in and aware; as Crowdfunding is part of our world, and is here to stay.

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