[gfodor]

First, I think it deserves mentioning that this post is not about things like Kickstarter, as far as I can tell, but about equity crowdfunding like AngelList. Kickstarter backers do not get equity in the company.

I don't really think the "good startups will opt for VCs, ergo only bad startups will go for crowdfunding" line of argument is really convincing. The reason being that how good or bad a startup is isn't really a knowable quantity both because it's an incredibly vague, meaningless concept and because at the funding stage not much about the future of the company is pre-determined.

That said, I do think the crowdfunding movement (equity and otherwise) has a major, often overlooked, negative. It's much better to have to deal with one or two VCs than be beholden to a dozen, or in the case of Kickstarter, tens of thousands of stakeholders. A good VC will let you drive the company and only provide high-level guidance and a rolodex, but an active community of a few thousand backers who don't want to lose their money will put your head on a pike if you don't deliver exactly what they were promised. (And odds are many of them have a completely different idea of what they are paying for than you do.) Good luck to you if you want to pivot once you have 10,000 backers on Kickstarter, for example.

However, if you have a very straightforward project that is well specified and has a concrete way to measure when it is completed or failed, like shipping a piece of hardware that is completely designed, if lack of capital is a blocker, crowdfunding seems to make sense. For more open ended projects like games or software applications I see Kickstarter has a horrible idea unless there are literally no other options. And even then, it might be worth it to just die instead of having to become beholden to thousands of people on a project you may lose interest in or won't be able to kill even when the writing is on the wall since it will destroy your reputation.

[arbuge]

AngelList has an invest online feature which groups smaller investors into a single LLC. Those investors also get fewer information rights than regular direct investors, IIRC. Not many startups there seem to be using this feature yet but it seems to me it could be an effective way to deal with the issue of many small backers if that changes.

And at the end of the day it's equity. Your clout is generally proportional to the number of shares you hold, share classes aside.

[npt4279]

Wefunder has the same feature. We've found that using a single-purposes LLC to aggregate smaller investors mitigates all the concerns that top-quality startups have. That, and a high bar for curation.

Disclosure: I'm a founder of Wefunder.

[gfodor]

Yeah I guess I wasn't thinking about this clearly enough. Equity crowdfunding doesn't really seem to have much of an issue since investors aren't really promised anything tangible other than some possible return. My general aversion to non-equity crowdfunding (is there a name for this) like Kickstarter is that sure, you get cash in the bank, but you now have a massive hidden liability on your balance sheet: an angry mob who will post horrible screeds on the Internet about you if you don't execute perfectly.

[thomaslangston]

You mentioned games in a previous post as being bad for Kickstarter, but I think this post proves you wrong.

An angry mob will post horrible screeds on the Internet about you if you don't execute perfectly on a game regardless if you used KickStarter or not. The developer's reputation is on the line whether you have KickStarter funding or not. The only real extra opportunity cost to under performing on KickStarter is closing off that source of funding in the future.

[gfodor]

Maybe, but consider two scenarios. In scenario 1, I use Kickstarter, get 10,000 backers, and release a shitty game, and predictably they blanket the internet with hate in every nook and cranny. The hate is just as much about me as it is the game, since my face and reputation are plastered all over the Kickstarter, and I was actively engaged with these 10,000 people during the entire process. They are personally invested not just financially but emotionally in the product over a span of months or even years.

In scenario 2, I self-fund or get a few angels, build a shitty game and release it with little hype or promises beforehand. It garners a few bad reviews from early adopters and gets 1-star ratings on all the gaming sites, but really it ends up just staying off the radar since it never builds an audience in the first place. This is typically what happens when a company releases a bad product, it just dies without much noise at all and is quickly forgotten about. Also, the negative feedback is largely about the game and not about me. If anything, the hate is directed towards my company but not me personally.

In other words, sure, releasing bad work is always bad. But in the case of Kickstarter, I feel you are exposed to a larger surface area of potential damage to your personal reputation. Kickstarter is a much more intimate and personal thing, and you are basically "putting yourself out there." The only real upside to using it is that it makes it incredibly easy to open a possible channel for funding, but it has crazy asymmetric risk in return compared to the traditional route IMHO.

edit: I guess one thing in Kickstarter's favor is if you actually get your 10,000 audiences and you deliver, you have some solid momentum coming out of the gate. The more I think about it the more it has the flavor of financial leverage: you magnify your outcome in either direction but have reduced flexibility (in the case of Kickstarter, due to the audience's expectations, in the case of financial leverage, due to the fact you are borrowing money on margin and can't make any big moves from there.)