Equity Crowdfunding Must be a System of Value Creation
Paging through the weekend crowdfunding news, I was taken aback when I read that the CEOs of two major crowdfunding portals, Indiegogo & Fundable, both agree that “[equity crowdfunding] returns aren’t likely.” Slava Rubin, CEO of IndieGoGo, and Wil Shroter, CEO of Fundable, opined on the issue at the Empact Summit in Washington, DC. (1)
From the article, A crowdfunding reality: Returns aren’t likely:
A bit later, Rubin went further and said that if his company ended up getting into crowdfunding to build equity in a company (as opposed to raising money for a project or a cause), he’d put the onus of warning of the dangers onto his own company. He’d have a cartoon with someone with their pockets empty show up every time someone invested as a way to show the potential pitfalls. “It will be like a cigarette pack that says ‘you will die.’ Instead, it would say ‘you will go broke,’” Rubin said.
The sentiment was shared by Wil Shroter, founder of Fundable, a crowdfunding platform for small businesses. People who invest in a business through crowdfunding and expect to see a return on that will be disappointed, but that doesn’t mean they’re victims of fraud.”Startups…mostly fail. The public needs to understand startups aren’t an easy investment,” Shroter said. “If everything goes extremely well. In seven years, you might get your investment back.”
For context: IndieGoGo is a pioneer of perk-based crowdfunding, and currently the second largest in the U.S. behind Kickstarter. They’re considering supporting equity crowdfunding post-JOBS (after raising a $15m Series A in June 2012, I find it hard to believe they won’t). Perk-based today, Fundable joins IndieGogo as one of the better capitalized and more experienced players in the equity-crowdfunding space. The founding team also operates the GoBigNetwork, a network that connects startups with accredited investors (comparable to Gust & AngelList), an asset they’ll surely leverage to bring deal flow and liquidity to Fundable.
This positions two highly reputable operators and thought leaders in the space as believing that equity crowdfunding for startups will not provide a positive return on investment to investors.
I can’t make sense of this. If equity crowdfunding, on average over the long-term, is a losing financial proposition, the critics are right, it has no place in our economy. It will be nothing more than a mechanism for value destruction.
Patronage has its place in crowdfunding. Kickstarter, having raised over $315m to date for new projects, ideas and movements, exemplifies this. But when for-profit motivations take the wheel – as they will in equity crowdfunding – patronage must take a back seat. Startups are not helpless, underserved entities deserving of our charity. In fact, charity will only hurt them. They need disciplined capital; capital that expects a return. Capital that believes in them, supports them, but will also hold them accountable in their search for a job-generating, value-creating business model.
Equity crowdfunding cannot become Web 3.0′s incarnation of a roulette wheel, with the the odds ever against those who play. This would not be the heralded democratization of capital markets many, including myself, are witholding; it would be the democratization of a VC model that, in aggregate, has proven to be broken, and destructive to value. This surely would not be sustainable. And while accredited investors have the means to chin the losses this model delivers, non-accredited investors do not; even with the caps, losing $500, $1000, let alone $2000, in a year wouldn’t just be a minor speed bump…
But this doesn’t have to happen, and I don’t believe it will. The industry will innovate into models that support a system of net value. We’re seeing glimpses of this today. Companies such as CircleUp are leveraging experience and domain-expertise (Consumer Products/Retail) to offer more qualified deal-flow. CommunityLeader is developing a portfolio management product that will help investors diversify and manage crowdfunding investments. And GATE Technologies, who recently partnered with Crowdfunder, is developing a robust secondary-market trading platform for alternative assets – a platform that stands to reduce liquidity risk for investors. (2)
Through robust disclosure, great investor education, ancillary market services and products that will offer guidance and support, and innovative structural mechanisms developed by competitive portals, equity crowdfunding can be a system of value creation. It must be.
(1) This article only speaks to equity crowdfunding, dynamics of debt-based and rev-share are quite different
(2) To be sure, the ultimate burden of risk must lie on the investor, not the Portal
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