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CrowdFunding: Trends and Opportunities

Posted on Tuesday, Oct 16th 2012

If you follow the technology startup industry, you have surely spotted the CrowdFunding trend by now. Made popular by KickStarter, numerous CrowdFunding sites have cropped up. We recently introduced you to Rock The Post, a site that works on a ‘donation’ model, whereby, the ‘crowd’ of investors funds projects, including causes like liberating Egypt. Typically, incentives include discounted early access to products, or the opportunity to be a part of something significant.

Currently, in the United States, only the ‘donation’ model of CrowdFunding is legal.

Of course, the entire industry is waiting for the JOBS Act to become legal, whereby, crowds of investors can not only donate money, but actually invest via traditional equity models. And of course, peer-to-peer lending has been around for a while, and some of it has been trickling over to startup financing.

For the most part, the impact of CrowdFunding on startup financing is still minimal.

There are, however, some significant opportunities that I see ahead:

First, Angels and VCs are ONLY interested in Exit businesses, and those focused on rather large market opportunities. This leaves 99% of the businesses outside the realm of their framework. These ‘Other 99%’ businesses are often excellent niche businesses, can be profitable, cash-generating concerns, quite capable of paying dividends to their shareholders. However, the  dividend model of investment is pretty much missing in the angel/VC industry. CrowdFunding could, conceivably, plug into this gap.

Also, today, even Angels, let alone VCs, are looking for validated businesses. However, if you need $50k-$100k to get to adequate validation to raise the follow-on $500k in seed money, there is a massive gap. So pre-seed, pre-incubation / incubation stage companies is something investors participating in CrowdFunding could look into as well. Caveat – these deals are difficult to assess, and unless savvy experts screen and rate them, the likelihood of success will be low, and we will have a lot of angry investors. Too much of that will kill the industry  altogether.

At 1M/1M, we work with both these categories of ventures, and more often than not, advise them to bootstrap, for lack of better options.

Finally, working capital financing is one of the key requirements of all small startups. Today, banks take notoriously long to approve minimum amounts of credit. If that pain can be addressed via CrowdFunding, that would massively lubricate small businesses, unleashing tremendous amounts of growth.

One of the reasons CrowdFunding is promising, in my opinion, is that there are opportunities of bridging these gaps once it becomes possible for a larger number of investors to play in the early stage startup financing market with more flexible models.

Nonetheless, early stage investment is a very risky affair, and I will be the first one to say there is no guarantee that a certain investment will pan out.

In summary, the real success of CrowdFunding for startups will depend on the screening and rating infrastructure that comes together to tackle non-financial heuristics in determining fundability at scale.

Note, scale is the operating word here. Without that, like venture capital, CrowdFunding will remain a cottage industry, addressing less than 1% of the small businesses out there.

This segment is a part in the series : CrowdFunding

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Even though Peer to Peer lending or informal lending has been around for ages, it runs completely on trust. For crowd-funding, to properly take off proper legal frameworks have to be in place. A few examples do exist in India like investing in Transport companies or film industry (one of the best example), yet a proper framework under guidance from SEBI is awaited. This is essential to safeguard the interests of the investors from "Fly by night operators / entreprueners".

Vivek Khandelwal Monday, October 22, 2012 at 11:50 AM PT
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