Crowdfunding Good, Crowdfinancing Bad

May 7, 2013

The rise of sites like Kickstarter, Indiegogo, Rockethub, Fundageek have successfully fueled the project dreams of artists, musicians, engineers and a plethora of other masters-of-the-universe.

Got the technology but not the funds to build a neurologically-engaged pillow that comforts the sleeper while providing high intensity dreams of succeeding as emperor?

These sites allow the project owner to profile and potentially receive funding to make their dream projects a reality. A lot of projects do not attract the necessary funding to move it forward, but some are successful and a few are wildly successful. Pebble Technology Corp sought $100,000 for their smart watch and ended up with over $10 Million in watch sales.

The interesting aspect here is not only the immediacy of the company’s success but the fact that this form of funding allowed the founders to garner all of the necessary capital for their company without parting with any ownership of their company. In a world where startup financing has nearly always demanded a trade of equity for risk capital, crowdfunding is a head-tilting, forehead-smacking, hair-pulling bit of brilliance.

MORE: Simple Tricks to Raise a Bunch of Money from Complete Strangers

Equally interesting is that the founders get an immediate reaction to their product before they launch. How much money, time and effort has been wasted by companies producing products that no one wanted? I was going to enter an idiotic product example here but every time I searched the most stupid product I could imagine, I actually found it online. Sigh.

Anyway, search the internet for “product failures” and you might have enough reading for the rest of your life. If you could get immediate, mass response to your offering, you know you are on the right track. If you put your product out there, promote the project and get negative feedback or you have to wince from the deafening silence of no response at all, you might want to go to Idea #2. But what a fantastic failure that is. The idea is born, discussed, designed and revamped. Then it is showcased to a chorus of No! and no one got hurt. No one mortgaged their home trying to get this thing out there for the benefit of none. No one raised money, only to watch it burn. No one left their job, only to beg for its return. Everyone just stared into their pint for a moment of disappointment, forgot it and went on to the next idea.

But like everything, nothing is perfect. Crowdfunding works sporadically well. If no one knows your project is there, no one will fund. Your levitating shoes might just be the answer for efficient travel, but unless your promotional skills are sufficient to get attention to the project, no one will see you, fund you, praise you or flame you.

The other issue is that it seems that success is currently limited to consumer markets. If your widget is suitable for Fortune 500 enterprise implementation, this is not your venue. Others have decided then that startup funding could be opened to the general public and people are hard at work to change securities legislation in various jurisdictions in an attempt to open equity investments to all. Then it all changes from crowdfunding to crowdfinancing and that is where the trouble starts. It sounds good. It sounds democratic and fair. Why should we be kept from doing whatever we wish with our money? Fair question. The reality is that startup companies fail in vast, almost unimaginable numbers.

Some jurisdiction somewhere will allow it eventually. There will be a few companies successfully raising a lot of capital. Someone will do well and create a valuable company. The media will hail the dawn of a new funding era. Then there will be a rush of companies into that space and people not wishing to miss the newest new thing, will open their wallets and plow in. Finally it will become the next tulip mania, tech bubble, sub-prime debacle as start-up companies fail en masse as they do every single day.

Venture capitalists invest in approximately 1% of the companies they see, but are still only receiving a great return on one, two or sometimes three times out of ten. Angel investors, going in earlier than their VC counterparts, usually have even worse outcomes. But the thing is that they are aware of the risks and they can normally handle the losses.

But this time it won’t be sophisticated investors with stacks of gold or venture capitalist with other winners to create the gains, it will be the scraped together savings of the public and they will lose. They will lose, they will scream out and they will demand that the government do something and do something fast.

Acting in the public interest, the government will intervene with regulations to increase bureaucracy and burden to every company raising capital everywhere. Every company’s progress will be slowed. Capital raises will slow. Jobs will be lost, innovation will diminish and we will all suffer. Fight it. Fight it at every mention.