What has been will be again,
what has been done will be done again; there is nothing new under the sun.
Solomon, King of Israel, circa 950 B.C.
Crowdfunding is not a new kind of investing. It is only a series of technology-enhanced approaches to known investing behaviors to be inclusive of Greater Numbers of Smaller Checks.
I predict that the winners in crowdfunding will replicate known early stage investing behavior and modernize what we have already seen in early stage investing. Aspiring crowdfunding startups should learn from existing investment behaviors and create systems that empower an extension of those behaviors to underserved populations.
I side with King Solomon when I suggest that crowdfunding will create nothing new. Here are the categories of known investment behavior that will be modernized by the impact of Greater Numbers of Smaller Checks.
Crowdfunding the Modern Telethon
When we think of a successful crowdfunding a project or business today, we look to the model pioneered by Kickstarter. This approach is essentially fundraising by donation. Rewards in the form of smiles, tokens of gratitude, and pre-orders. It is the same fundraising model used by radio stations and TV preachers around the world. Kickstarter has modernized the telethon, a proven model for fundraising used for generations.
I am going to go out on a limb and say that Kickstarter is already the winner in this category. Indiegogo picks up the scraps (millions of dollars of scraps), but I expect they will be a contender in other crowdfunding verticals as they look for a leading position.
Crowdfunding the Modern Lender
Prosper and Lending Club are the winners in peer-to-peer lending, but allow me to abstract them from this crowdfunding discussion. Both companies cater exclusively to individual borrowers (technically, you can borrow for personal expenses as you start a business) and neither are for businesses as the borrowers.
That leaves the space wide open for the mordernizing of lending. SoMoLend is the up- and-comer in this crowdfunding vertical. The CEO Candace Klein is one of the Jobs Act authors, and she is very well connected in the industry. SoMoLend is poised to lead with debt- based crowdfunding when the Jobs Act is enacted and is already accepting loan applications from businesses with banks as the lenders.
Until the Jobs Act is enacted, it is still anyone’s game to win. Lending is a very well established investment behavior, so this vertical could be very exciting.
Crowdfunding the Modern Angel Group
Didn’t you know? Angel investing in groups is crowdfunding, which has been common for decades. Need a million dollars and $50,000 is the best you can get from your uncle’s golf buddy? Pitch to the whole country club for 19 of his other friends to match him. Boom. Crowdfunding.
There is a widespread rumor that once non- accredited individuals can invest directly into startup companies, there will be a flood of capital from the unwashed masses, who are supposedly starving for high-risk, high-return investments. This misconception is likely caused by the high correlation of people who know what an accredited investor is and those who try to raise money from them (esp. for crowdfunding startup concepts). Alas, if the behavior of experienced accredited investors is any indication, this is going to be an uphill battle to introduce this new kind of investment behavior to the masses in a widespread way. Niche players, beware.
Angel investing in groups has all sorts of social behaviors attached to the process that can be replicated or mitigated by a crowdfunding platform. There is definitely room for someone to empower unaccredited individuals the way that angel group managers empower their own members, accommodating for the scale of Greater Numbers of Smaller Checks.
In this category, I say watch out for YC’s own FundersClub. They understand the problem and are attacking it well, as far as I can tell. Arguably, FundersClub is operating closely to a fund with the individuals as Limited Partners. But that argument only holds if FunderClub is committed to adding value to its companies. Which brings us to our next vertical.
Crowdfunding as the Modern VC Firm
What if you could raise money from the public like a venture capitalist raises and invest a fund on behalf of limited partners? The key differentiator in this crowdfunding vertical is the adding of value to the capital of the crowd. I am an advisor to Revenue Trades, who is taking on this vertical, so I will not comment on their potential as a leader of it.
Crowdfunding that incorporates a value-add component may have an advantage over dumb money crowdfunding approaches. The potential of someone to add value and thus validate an investor’s decision is a different way of compelling investors than letting the startup speak on its own. This vertical of crowdfunding has the greatest potential to disrupt the venture capital industry, especially if Limited Partners can include Greater Numbers of Smaller Checks alongside traditional institutional investors.
Crowdfunding Complex Financial Instruments
When crowdfunding matures, we will begin to see specializing of financial arrangements that drive particular performance metrics by the business or meet specific return expectations by investors. These financial innovations are only viable once the standard expectation of businesses and investors are being met. New innovations will serve new expectations, and the crowdfunding economy will blossom. The leader in this vertical would be the equivalent of the Goldman-Sachs of crowdfunding, a beautiful and frightening idea to ponder.
That is, unless we as the startup community manage to screw it up first. Responsible development and execution of financial innovation that redefines the entire funding landscape? Well, I guess that would be something new.