Where Does Crowdfunding Fit In the Capital Chain

Weeks ago, I was the guest speaker in the venture capital class at Columbia Business School. Speaking at my alma mater is always fun–I speak and judge on a regular basis at their Startup Lab or other events. This time, I was invited by my friend and consummate angel investor Anne Busquet. My job was to talk about the role of crowdfunding and where it fits into the capital raising process. For this talk, I decided to step back and really think about the crowdfunding process now that my company has offered non-equity based crowdfunding for the last year.

Crowdfunding has earned its place as a legitimate form of financing, especially to test market products. One need only think of the Pebble Watch, which has raised over $30 million from two successful campaigns. With that type of product validation and capital, you can ask why raise venture money and give away equity ownership?

Most people–if they have heard of crowdfunding at all–assume that some public “crowd” gives you money once you post your campaign on a website. Nothing could be farther from the truth. In fact, on our site and every other site, 80% or more of the funding comes from your friends, your own circle, and your network. I always remind campaign creators that people don’t get up on Saturday mornings and go to these sites looking for something to fund.

The reality is that campaign creators do lots of hard work in reaching out and contacting people they already know to ask them to support what they are doing. Crowdfunding online is no different than other types of fundraising for political campaigns, college annual funds, museums, and nonprofits. It all starts with a person you are already connected to asking you to give money.

Another major myth is that the crowdfunding platform you use will draw a huge number of visitors to your campaign. This is not the case. At any time, there are thousands of live campaigns on the biggest platforms. The only campaigns that are profiled on home pages or in emails are the top performers that have already garnered significant traction. So, if you are a project creator looking to boost the traffic to your campaign through a platform, you had better already be a rock star.

I understand the euphoria around crowdfunding as excitement for a new way to target inequity in the capital raising system, and provide a broader access to funding. But the sad reality is that the vast majority of campaigns fail. The two best known crowdfunding platforms have failure rates between 60% and 70%.

Many of the crowdfunding misunderstandings are partly due to the fact that the media covers the outliers: unicorn campaigns that raise over $1 million dollars. Those campaigns represent less than a half of 1% of all campaigns.

Does this mean that I am negative about crowdfunding? Absolutely not. I think we will see an evolution of crowdfunding platforms as the public learns more. We are likely to see the sites differentiate themselves by services and value. At Plum Alley, we narrowed our focus to outstanding women entrepreneurs or companies with diverse founding teams. That represents our roots and knowledge base. We provide more assistance than other platforms to make sure these companies succeed. We are looking for an ongoing relationship with our clients as they prosper and move up the capital chain.

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