Crowdfunding platforms, such as reward-based Kickstarter and equity-based Crowdfunder have been shaking up the venture capital world.
Just a few years ago in 2010, the total amount of funding by crowdfunding platforms amounted to $880 million. As exhibited in the chart above, the crowdfunding market has been rapidly growing. The World Bank has estimated that the crowdfunding market would hit $90 billion by 2020.
In the past, venture capitalists received investment offers solely through referrals, their networks or website submissions. Funding an entrepreneur was a long process, which required venture capitalists to review the business plan, the management team, and they also had to conduct their due diligence. However, now, crowdfunding has changed these two major aspects of venture capital funding.
Crowdfunding platforms provide venture capitalists with a higher rate of investment opportunities. Venture capital firms are now fishing in the crowdfunding pool. According to CB Insights, almost 10% of all projects that achieve $100,000 of crowdfunding have varying degrees of venture capital funding following the crowdfunding campaign. CB Insights further substantiate that since mid-2014, more than $300 million of venture capital money has funded these projects.
Secondly, crowdfunding platforms enable venture capital firms to have a more quicker and efficient due diligence process. Crowdfunding platforms requires entrepreneurs to provide a standard set of information, which can be easily looked up by investors.
In essence, many venture capitalists do value crowdfunding. It allows them to spend their time more efficiently and effectively, focusing on the extraordinary, valuable start-ups. However, how do you think venture capitalists can compete with the scalability of crowdfunding platforms? Do you think that there is going to be large shift in the venture capital industry from seed funding, to early growth and later stage funding? Do you think crowdfunding will be able to pull funding for later stage companies? What does the future of the funding industry look like to you?
Sources:
Emmerson, L 2o15, ‘Crowdfunding Industry Overtakes Venture Capital and Angel Investing’, Symbid Blog, blog post, 8 July. Available from: <http://blog.symbid.com/2015/trends/crowdfunding-industry-overtakes-venture-capital-and-angel-investing/>. [9 Oct 2016].
Hogg, S 2014, ‘How Venture Capital and Crowdfunding Can Be Mutually Beneficial’, Entrepreneur Magazine, 23 December. Available from: <https://www.entrepreneur.com/article/239177>. [9 Oct 2016].
Hollas, J 2015, ‘Why Venture Capitalists Are Turning to Crowdfunding’, Entepreneur Magazine, 20 Jan. Available from: <https://www.entrepreneur.com/article/240984>. [9 Oct 2016].
