Despite its democratic approach, how crowdfunding – a vehicle to help entrepreneurs raise money – is remarkably similar to venture capital funding.
Crowdfunding got a stamp of approval as a stable source of raising capital for both established companies and startups. This, following a 2013 study by Wharton management Professor Ethan Mollick.
The trend is made possible by Web sites. The sites make it affordable and easy for entrepreneurs to raise cash.
Ironically, crowdfunders are just as savvy as traditional sources of funds – venture capitalists – in picking the winners in which to invest.
“They are looking for similar signs of quality,” says Dr. Mollick. “There are things that increase the chance of being [crowd]funded if your backers don’t know whether you’re going to be successful yet.”
He examined Kickstarter, a crowdfunding site, for clues in how donors evaluate possible investments.
Entitled, “Swept Away by the Crowd? Crowdfunding, Venture Capital and the Selection of Entrepreneurs,” he studied 3200 projects – hardware, product design, software, and video games.
The professor examined the funding priorities of investors:
“Does the project creator have experience in the field? Do they have a prototype? Do they have an endorsement from a prominent organization or individual? Those factors increase the chance a company is going to be successful, and they’re things a venture capitalist looks for as a signal of success. They seem to be the things crowedfunders look for, too.”
“You either believe that we have an existing system that makes sure the best computer science people work at Google and the best entrée funding is given by venture capitalists … or you believe that talent and opportunity are more widely distributed and that because of differences in opportunity, geography and background, people don’t have similar chances,” states the professor.
“What makes crowdfunding so interesting is that this puts the possibility of creating things in the hands of more people,” he adds.
The movie, “Veronica Mars,” is a good case study.
Creator Rob Thomas set a $2 million goal. Warner Bros. pledged n marketing and distribution support for a limited theatrical run.
The objective was attained in just 11 hours on Twitter. Later, 91,585 backers funded $5.7 million in a 30-day period.
Twitter’s role is not a surprise. Here’s how Twitter levels the playing field for small cap companies.
Kickstarter touts more crowdfunding successes: 10 percent of entries at a Robert Redford Sundance Film Festival in 2013.
“Something’s happening: There’s a lot of money flowing, there’s policy and there’s promise. It’s the culmination of a bunch of things we care about,” adds Dr. Mollick.
“Trends like this have been coming together for a long time now,” he says. “Is it more democratic? Yes. But quality seems to matter, and that’s important and interesting. There are still a whole bunch of interesting questions that we don’t have answers to.”
Read his paper here.
From the Coach’s Corner, millions of entrepreneurs, investors and job seekers are excited about the Securities and Exchange Commission’s crowdfunding rules.
Here are more resource links:
What Should You Divulge When Asking for Investment Capital? — If your startup is the next big thing, but you want venture capital, you can start smiling. Yes, financing has been difficult to obtain in recent years. But entrepreneurs wanting venture capital have reasons for at least a small celebration.
How to Attract an Angel Investor — Now that a UNH study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? An angel investor offers seven tips.
8 Strategies to Consider Before Starting A Tech Business — Before you launch a tech business, here are eight salient strategies to remember.
“If you can dream it, you can do it.”