TheRodinhoods

Crowd-funding for startups. Is it a good idea?

Crowd-funding is certainly gaining popularity in certain markets. However, for crowd-funding to work well for all parties, it is important that the entrepreneurial eco-system in that market is mature and has investors & entrepreneurs who have seen some cycles of ups and downs. 

Here’s why:

Funding startups carries the highest level of risk. The percentage of startups that become successful AND are able to provide a exit and good return to an investor are very low. Hence, unless the ‘crowd’ comprises of folks who understand the underlying risks (or unless the investor group managers educate the investors well in advance), there is likely to be too much friction due to mismatch of expectations of returns on individual deals.  

Inexperienced investors who invest because they have ‘heard’ or read in media of sky high valuations for some startups, often are not aware of the risk ratio in investing in startups. They may often not be aware that investors most likely lose money in 6-7 of the 10 companies they invest in. May be one or two out of 10 companies may return the money invested, may be with some modest returns. And, probably one of the 10 may provide a decent return to make up for the losses but also provide the surplus to deliver a decent return on the total capital invested. Given this kind of stacking of successes and failures, over a 4-5 period most investors, if lucky, are not likely to make signinficantly more money than they would have on their overall portfolio of investments (stock markets, commodities, real-estate, etc.). A far cry from the ‘solid valuations and handsome & quick returns’ in startups they read about in the media. (What one sees in media are exceptions and one cannot plan life assuming exceptions to work in your favour… and certainly not consistently). 

Now, in many cases, when inexperienced investors are expecting breakout results, and are instead faced with losing capital in a company, they may start getting anxious and therefore pose challenges of investor expectation management for the founders of the startup. They could get interfering and imposing their views. These are real challenges, and certainly an unwanted distraction. 

However, that does not mean that crowd-funding per se is not a good option. It just means that you need to take care of a few basics before you accept ‘crowd-funding’:

 

Hope you have a great experience in crowd funding your startup. Do let me know about your experiences, and any additional suggestions and learnings that you may want to share.