Angels in the Crowd–Is Crowdfunding The Next Wave?

Of late there has been a growing buzz in the early stage investments space – lots of seed stage funds, incubators and entrepreneur mentoring platforms have come up – which is definitely a very encouraging sign.

An interesting innovation in this area is the advent of crowd funding platforms for startups, which – simply put – allow the crowd (people like you and me) to participate in the early stage funding process. [You can give GrowVC a whirl in case you haven’t already – a global platform that connects entrepreneurs with funders and mentors. Another similar example is AngelList. In a way, SecondMarket also allows one to get a piece of the pie of private unlisted firms, although it is more of secondary sale]

Crowd funding for startups is undoubtedly an exciting phenomenon – as it turns the traditional investing model on its head – wherein typically the ‘smaller’ investor comes in only when the company becomes ‘larger’ – large enough to have got listed on a stock exchange with all the regulatory hurdles cleared – thus making sure that the ‘small’ investor’s interest is safeguarded (as it is not efficient for people like you and me to perform a thorough due diligence of a company to invest an amount as small as say Rs. 10,000.).

The big plus of such a concept is for the startups themselves – they get a platform to showcase their product/service, and also a forum where they can get a general perception of how good their business model is according to the ‘crowd’ (Although the ‘crowd’ – who are mostly investors – may not really be the ‘end customers’ for the startups – so it is possible that even the ‘crowd’ may not be able to appreciate the solution that the startup is intending to provide). Not to forget, of course, the main objective – which is to get themselves some funding!

Show me the money
Show me the money

From the funders’ point of view, apart from being an opportunity for ‘small’ investor to be part of the early stage investment space, it also creates a pool for early stage funds to build a pipeline of deal flow.

There are big challenges to be overcome though. For one, the platforms have to strike the right balance between the following two extremes

  • Potential investors ending up NOT investing in startups – because it may not make sense to invest a lot of time to study the startup/entrepreneur/ business model – given the amount they want to invest is so small [As against, angels/seed stage funds – who spend a lot of time to understand the startup and the entrepreneur, but also invest a substantial amount]
  • Potential investors following a herd mentality – and ending up (frivolously?) investing small amounts, but in large numbers [GroupOn/Facebook Valuations on SecondMarket?]

Moreover, the Capital Market regulators would also come into picture – making the regulatory environment more stringent (which is of course, good in a way!) [The SEC has already shown its inquisitiveness towards the SecondMarket transactions!]

We have already seen the rise and (relative) fall of the Microfinance industry. We probably need to keep a check to make sure the ‘Microequity’ concept sees a comparatively smooth sailing.

What’s your take?

[Guest article contributed by Mandar Kulkarni]

Note from Ashish: There are a lot of other open questions regarding crowdfunding model, especially related to “privacy” of a business plan (who gets to see my bplan? Do I control it? Who is the crowd here?). Over the next few days, we will share some of our thoughts on the crowdfunding piece and will cover the ground reality as well. If you have insights/perspective in Crowdfunding model, do share.

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