Is Crowdfunding Diluting What Angel Investors See?

Is Crowdfunding Diluting What Angel Investors See?

10:00 08 June in Blog
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“Crowdfunding isn’t about collecting money. It’s about making something happen with a crowd of people who believe in something.” – Jozefien Daelemans

Investopedia describes crowdfunding as “the use of small amount of capital from a large number of individuals to finance a new business venture.” Crowdfunding seems ideal for entrepreneurs as it limits the need to present a business plan, research, and profitability; but, can create tricky legal situations for both the entrepreneur and investors as there are strict rules and regulations for who can invest and how.

ADVANTAGES

PLATFORMS

Crowdfunding has become a huge phenomenon of the 21st century with many companies launching platforms that individuals from all over the world can elect to participate in. Having a wide variety of potential investors creates a plethora of marketing for entrepreneurs and increases their chances of reaching goals.

PRESENTATIONS

Entrepreneurs working towards acquiring funding for their venture must complete a thorough business plan, pitch deck, and have significant research with expected profitability. Crowdfunding provides a more care-free approach to funding for entrepreneurs in which they must simply create an engaging profile and unique video explaining their product.

FUNDING FAST

Angel Investors, Bank Officers, and Funds all require term sheets and negotiations securing their investment into any entrepreneurial venture. Crowdfunding simply tasks entrepreneurs with choosing a funding goal, once the funding goal has been met the money is dispersed to the entrepreneur.

TEST MARKET

Often getting in front of an entrepreneur’s target market can prove difficult, crowdfunding provides an easily accessible platform to share your ideas and gauge interest in their product.

DISADVANTAGES

FAILING PROJECTS

According to Forbes, 90% of start-ups fail. Failed projects can ruin reputations between the entrepreneur and the market and can create legal issues if the deal is not fulfilled. Additionally, funding is only provided to entrepreneurs if their campaign reaches its funding goal.

MENTORSHIP AND ADVISORY NETWORKS

Entrepreneurs pursuing crowdfunding lose out on many enriching opportunities and mentorship possibilities that they would receive by working with a Bank Officer or Angel Investor. Angel Investors invest funding, time, and energy into companies they invest in and spend considerable time mentoring the entrepreneur to success.

RULE AND REGULATIONS

Many people don’t realize that they cannot invest into any and every venture asking for funding. There are 4 key rules in Title 17, Chapter II, Part 227, Regulation Crowdfunding, General Rules and Regulations, “[(1)] require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal, [(2)] permit a company to raise a maximum aggregate amount of $1,070,000 through crowdfunding offerings in a 12-month period, [(3)] limit the amount individual investors can invest across all crowdfunding offerings in a 12-month period and [(4)] require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering.”

GOOD FOR PRE-SEED CAPITAL, NOT GROWTH CAPITAL

Crowdfunding is limited to raising $1,070,000 as stated above, this creates difficulty for entrepreneurs who need significantly substantial amounts of funding to really grow their venture. Angel Investors are a great way for entrepreneurs to meet their funding needs once finishing their pre-seed round goals.

Overall, it seems that Crowdfunding can be a great way for entrepreneurs to launch their product or service initially; however, crowdfunding proves difficult when entrepreneurs need more funding down the road and have already met the maximum funding allowed by the SEC on crowdfunding platforms. Angel Investors prefer to invest in seed-capital and growth-capital companies that have some form of establishment already in place; therefore, crowdfunding may limit what Angel Investors see to some extent or may delay the process but it is likely that entrepreneurs who succeed will need Angel Investing at some point anyway.

Kaitlyn Barber

kmbarber@svsu.edu
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