5 Reasons VC Funding Still Beats Crowdfunding
There has been a lot of hype lately about crowdfunding campaigns and for good reason. The crowdfunding industry is expected to surpass venture capital in terms of the amount of investment allocated to startups. It can easily be implied by this aggressive growth that crowdfunding is a surefire way to get funding and the go-to place to get money for your business. For many startups, this may be the case, especially if they can manage to get funded without giving away any equity at all. This article helps to provide some arguments for why you should consider remaining loyal to venture capital rather than being quick to pursue seemingly cheap equity by appealing to the crowdfunding market.
1. Venture capital firms offer more than just capital
Many venture capital companies offer strategic resources that crowdfunding cannot offer. For instance, a venture fund may have other companies within their portfolio that enable synergies to help your business. One example may be a venture capital company that has manufacturer relationships that can ensure lower prices and greater stability in the supply chain that would otherwise not be accessible. The synergies that are accessible by a venture firm are often difficult to value at an early stage, but should certainly be weighed in your decision to determine where you will acquire financing.
2. Having many backers can be dangerous
If you have spoken with entrepreneurs that have successfully exited a company, you are likely to hear some horror stories of dealing with demanding investors. Large companies with many investment rounds may have upwards of ten investment groups backing them that can all be requesting information about the company and be annoying. If you are crowdfunded, you may have to multiply this figure by one hundred or more. Even if your backers just expect a product, there have been cases of a company receiving a poor reputation before it has the opportunity to scale in the market.
3. Crowdfunding can cause premature product releases
Many crowdfunding campaigns are backed by products that they intend to release onto the market. When this occurs, the product may be prematurely released to many consumers before it has the opportunity to even be Beta tested with a small market. This means that you have a large amount of purchase orders that you need to fulfill and are suddenly rushed to fulfill this backlog. Meanwhile, the online community is demanding their product promise and calling you for information on its status. You quickly find yourself with 50,000 orders to fulfill of a product that is not ready for an official launch until six to eight months out and builds a negative impression on the market before the launch. This is not a theory based on a hypothetical scenario, but founded on a series of historical cases.
4. Big venture names can give your company clout
When Google Ventures backs your company, there is very little that you need to worry about. Not only will you have top-tier ivy league MBA graduates knocking at your door, but you will also find that forming strategic partnerships and acquiring media attention is much easier than having 10,000 crowdfunding backers. It is surprising how many companies that we have seen never apply to the top venture firms and immediately resort to crowdfunding. It is accurate that many of these venture programs are highly competitive and it is unlikely that you will pass the screening round, but it is definitely worth the effort to get that exposure.
5. Crowdfunding has its financing limitations
When you are backed by a venture capital group, you can easily raise tens or even hundreds of millions of dollars in order to operate. Crowdfunding can enable you to raise a small amount of capital, but nowhere near the amount of venture capital firms. The reason that crowdfunding financing is expected to surpass the venture capital industry is because it consists of many smaller micro-investments that would otherwise not receive venture financing. The screening criteria of venture capitalists can be rather extensive and challenging to pass. Therefore, it is not always an option for all companies, but is definitely worth an attempt when you weigh all factors into your financing decision.
We hope that this article has helped you to think before you leap onto the crowdfunding bandwagon. It is certainly not an argument against using crowdfunding to finance your company, but rather a proposal for pre-meditation. We strongly encourage you to consider the costs and benefits of all financing options before you select one. The cost of capital is not always free with crowdfunding as it is promoted in the press, especially when you weigh the synergies and value that a venture firm bring to the deal table.
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