Crowdfunding platforms are the easiest way to access startup investment opportunities for investors. However, the data shows that companies receiving crowdfunding massively underperform companies that received venture funding.
Venture backed companies experienced an Exit for their investors 4x more than crowdfunding companies and were nearly half as likely to have Died.
There are a number of reasons why this is the case:
Support: venture funding not only brings capital, it brings the support from investors with the experience to grow and scale a business, as they are often entrepreneurs themselves.
Network: venture capitalist’s networks are often far larger than those of the many crowdfund investors that back a company
Strict targets: venture backed companies are typically given strict targets and are monitored continuously on relevant KPI’s to meet those targets. Crowdfunded companies typically receive less of this pressurised guidance for growth.
More sensible valuations: as one CEO of a crowdfunding platform said, ‘retail investors can be given tougher terms and their due diligence will be minimal’, which often means that company founders can get away with raising money for their business at higher valuations. This not only reduces the incentive for founders to grow their businesses to scale, but also makes their business less attractive to other investors in the future. Venture capitalists negotiate more realistic valuations with early stage founders, leading to greater returns for themselves and their investors.
Attempting to pick winning companies on crowdfunding platforms is fun but bears considerably more risk. Investing with experienced venture capitalises enables you to ride off better odds and allow you to spread your capital over a wider range of startup companies to achieve diversification.
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