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'Crowdfunding Is Only for Crappy Companies That Can't Raise Venture Capital.' Poppycock!
Naysayers Suggest Crowdfunding Is Only for the Unwashed and Unworthy. Here's the Truth.
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I’m not a financial advisor; nothing I write in Superpowers for Good should be considered investment advice. You should seek appropriate counsel before making investment decisions.
I’m sick and tired of hearing this crap. That’s what it is. I’m sorry, but smart people who otherwise spend their days doing intelligent and kind things are still thinking that crowdfunding is for losers. It’s not.
Let me explain this in terms anyone can understand. And please, do me a favor. Share this message with someone you love. Heck, share it with everyone you love.
Regulated investment crowdfunding is not for losers, the unwashed or the unworthy. It’s for every good company out there. It is for every investor.
Does that mean that sometimes a crappy company will raise money via crowdfunding? Yes. But don’t stop reading! Remember, those genius venture capitalists who sometimes lead the chants about poor crowdfunding results frequently get it wrong, too.
Bottom-quartile venture funds often deliver negative returns to investors. Most companies that receive venture capital fail anyway, despite the heavy screening that means only about 1 in 2000 companies raise venture capital. That highly selective process yields a lot of failures.
In fairness, the top venture funds deliver gonzo returns. They do this despite the fact that even at top funds, many of the companies they back don’t deliver. The ones that do achieve spectacular results. So, if you’ve got tens of millions of dollars to invest, call Marc Andreeson and see if he’ll let you into his a16z.
Otherwise, may I suggest you consider investment crowdfunding?
Some startups raising money via regulated investment crowdfunding will deliver genuine venture capital returns. Venture capital firms typically look for companies that can achieve unicorn status ($1 billion valuations). But that scale isn’t required for VC-like returns.
The key to VC returns is the valuation of the investment. If a business has the potential to be worth “only” $50 million within ten years and you want a 10x, venture-style return, the current valuation of that business should be about $5 million. Do the math before you invest.
Of course, many businesses raising money via crowdfunding won’t deliver venture capital returns. Many are using debt structures to provide investors with fair returns.
Consider a successful food truck operator that wants to open a restaurant. The cuisine and the market are proven. A location has been found. The chef just needs some capital to sign a lease and equip the restaurant.
They might use a revenue-sharing note that pays lenders like you a small percentage of the gross receipts until you’ve been paid back all your money plus a return. How long that takes will be a function of the restaurant’s success—how often you and the other noteholders eat dinner there and how often you share your love on social media.
Such an investment isn’t crappy. It’s different. It isn’t a venture capital return, but it isn’t venture capital risk, either. In this hypothetical, we know the chef can cook and run a successful business. We know people eat the food. It’s not VC risk, so it doesn’t deserve VC returns.
Some investments available via crowdfunding may not deliver a fair market financial return. Instead, they may deliver social impact with a more modest return.
The Impact Cherub Club includes many of the readers of this newsletter; we’ve chosen 17 companies to back over the past year. Some, like cleantech company Joule Case, are venture-like; we hope for big returns to match the environmental impact.
Ziba Foods, another company on our list, raised a round of emergency funding for its business supporting women in Afghanistan after the US military abruptly pulled out of that country. The social impact was the focus of that investment. Getting our money back was a distant secondary concern.
If that sounds like a crappy investment, guess what! You don’t have to invest in low-return, high-impact projects like Ziba Foods. You can focus exclusively on investing in high-probability companies like Joule Case.
We’ve often chosen to back entrepreneurs, including women and Black Americans, who don’t get their fair share of venture capital.
Some companies raising money via crowdfunding have already raised money from well-known angel investors or venture capitalists. Last month, I shared the story of Parker Clay, a social enterprise with its production in Ethiopia, primarily employing women who’ve experienced sexual exploitation.
Parker Clay is hugely successful in selling high-quality leather goods at relatively affordable prices. They received a round of venture capital from Renew Venture Capital, which then strongly encouraged the founders to raise additional capital via crowdfunding. DealMaker is helping the company raise a target of up to $15 million under Regulation A.
Increasingly, I’m hearing smart people say that VCs are looking for companies raising money successfully via crowdfunding. VCs are learning to follow the wisdom of the crowds.
So, let’s recap:
The vast majority of companies don’t raise venture capital—that doesn’t make them crappy
Many companies that raise venture capital fail
One-quarter of all VCs are in the bottom quartile with poor returns
Crowdfunding provides capital to a wide range of companies
Crowdfunding allows investors to choose risk and return profiles that fit their investment strategies
Crowdfunding allows investors to choose impact profiles that fit their impact strategies
In other words, crowdfunding rocks. There is no better way for ordinary investors to build portfolios of investments in private companies, support impact and have fun.
So, the next time someone tells you that crowdfunding is for losers, say, “Poppycock!” Then share this newsletter with them.
If you would like to join us for the next Impact Cherub Club meeting on February 21st at 1:00 PM Eastern, sign up here.
If you want to learn more about investing via crowdfunding or raising money for your social enterprise, join us for SuperCrowd23. Readers get 50 percent off!
If you are interested in Black History, I would suggest there is no better tome than this award winner, The 1619 Project.