| A lot of folks are making ad hominem arguments that because it is a VC arguing against crowd funding, he must be wrong because of who he is. Let's see if we can focus on the reasons why his arguments are wrong, not just that he is a VC. Valid reasons why he may be wrong: - He argues that good startups have no trouble raising VC. On the contrary, many VCs have poor ability to determine what is a good investment, and many good startups have war stories to tell of how difficult their first financing round was. Therefore, crowdfunding could benefit good startups because raising money from VCs is not easy even for quality startups, because VCs are (as a class) not particularly good at identifying quality. - Investor selection: sure, getting top-tier VC has soft benefits. But there are costs as well: VCs have more board power, can often force a founder to step aside, or will force a sale to liquidate equity to distribute returns to LPs. Yes, individual investors may not add as much "soft value". But the power dynamics are different and in some ways there may be lower risk to the founder. - Later stages: so what if crowdfunded companies don't turn to crowdfunding for second rounds? Crowdfunding will work best for early stage. If the business turns out great, and the company needs large amounts of follow-on funding, then getting $20mm from institutions will be more feasible. But it is difficult to understand why that's a serious problem for earlier stage crowdfunding. - Marketplace for lemons: information asymmetry also exists for VCs with startups, so the lemon argument against crowdfunding is not unique versus VC. In short, these are interesting ideas against crowdfunding, but none stand out as particularly compelling, or they can at best make a claim against crowdfunding for certain types of deals, rather than against crowdfunding as an asset class. |
The question is: why is that? Having been an investor and an entrepreneur, I certainly agree that VCs miss many good companies and fund many bad ones. But that's not for lack of trying, expertise, time spent, or motivation.
If you think that crowdfunding will do better than VCs (as a class), then you must either believe that the crowd has some ability that VCs can't develop (and what is that and why can't VCs develop it?) or that the crowd will simply fund everything regardless of quality.
I personally don't believe the first and am not sure the second is the best answer.
Personally, I think crowdfunding--especially as AngelList does it--could very well be the future of the seed/early A round. I don't think the crowd will get better returns than VCs, but I also think the crowd won't care very much about okay-but-not-great returns; that may be the reason it works.