Business Magazine

Don’t Count on Crowd-Funding to Save Your Startup

Posted on the 25 June 2011 by Martin Zwilling @StartupPro

Idea on a NapkinOne of the hot new approaches I have seen around the country for assisting startups looking for funding has been “crowd-sourcing” sites (Kickstarter) or “crowd-pitching” events (Funding Universe). These are variations on a “crowd-funding” theme to raise money for a startup through social networks and voting at public events. I’m still waiting for a startup to proclaim real success from this approach.

Crowd-sourcing tools, usually Internet applications, use the social media to poll for interest, feedback, and ultimately some funding for the startup. This is a complex task, especially as it involves creating an accurate yet compelling offer, collecting the money, and rewarding the investors.

Crowd-pitching is an offline event, but logically similar, which give several candidates an opportunity to pitch to a crowd of interested people for a couple of minutes, after which the crowd “votes” with some play-money to pick the best candidate, who then wins some nominal investment amount or services.

Certainly both of these crowd-funding approaches provide the entrepreneur with an opportunity to hone his pitch, and get some real consumer feedback on the idea. But from my perspective representing investors, this approach falls short on several counts:

  1. Focus is on the product, not the business model. When pitching to consumers, online or offline, the feedback will likely be on features and design. The key success factors of the business model (how you make money), management expertise, and financial projections will likely get overlooked.

  2. Amount of funding provided is very small. The amount of time and money required for publicity and promotion of any crowd-funding activities may be more than the return. In reality, a few hundred or even a few thousand dollars to a few winners, is probably not a return on the investment required.

  3. Multiple micro-investments are not manageable. Investors know how tough it is to get a set of terms accepted by even two investors, much less hundreds. The administration of legal conditions, signatures, disclosures, and distributions is a nightmare. In my opinion, that’s why micro-finance has rarely worked, even for loans.

  4. Proposal content is too short to be meaningful. In all cases, to keep non-professionals attention, the content of the offer online, or pitch presented, is very limited. No one contemplates including a business plan, investor presentation, or even the equivalent of an executive summary.

  5. Crowd sample size and makeup not representative of market. If the pitch is offline, the audience is likely to small and mostly budding entrepreneurs. Even online, the type of people who may respond to social media requests may bear very little relationship to the intended market.

  6. Investors are not prepared for the high risk of startups. Crowd-funding investors are not constrained to be accredited professional investors. They may not understand that nine out of ten startup investments provide no return, and the risk of securities law violations is very high.

  7. Intellectual property is jeopardized. Non-disclosure agreements can’t be done in these environments. In an environment populated by entrepreneurs rather than investors, when you are new to the game, you are exposing your plan to your biggest potential competitors.

Some groups are making an effort to mitigate these problems by pre-screening the candidates, and providing an experienced panel of investors to do the judging. This helps by making sure the feedback is realistic, and the presenters have a rational business opportunity to present. I’m already working with a couple of organizations along these lines.


You Might Also Like :

Back to Featured Articles on Logo Paperblog

These articles might interest you :

  • Artisanal Skincare Holy Basil Cleansing and Toning Water Review

    Artisanal Skincare Holy Basil Cleansing Toning Water Review

    As we all know how important the toning step is in our regular CTM routine. Lately I have been loving floral waters or hydrosols as toners and so far I have... Read more

    8 hours, 55 minutes ago by   Skincarevilla
    HAIR & BEAUTY
  • Soon By You Episode 4: The Dates | Soon By You (video)

    Soon Episode Dates (video)

    David and Sarah finally go on their first date. Jacobs explores foreign avenues for a love connection and Noa, Ben, and Z take up volunteering. Read more

    10 hours, 12 minutes ago by   Gldmeier
    RELIGION, SOCIETY, SPIRITUALITY
  • Locaflea Summer Jam 2017 Starts Today in Ahmedabad

    Locaflea Summer 2017 Starts Today Ahmedabad

    Shopping is the best remedy, someone said it and it’s true, especially when your city is boiling and the temperature stays beyond 38 throughout the day or even... Read more

    10 hours, 22 minutes ago by   Hetal Shah
    FASHION
  • Summer Makeup Tips for Long Lasting Makeup

    Summer Makeup Tips Long Lasting

    Hey everyone today’s post is very informative and very useful for the hot scorching summer time. I am going to talk about my most used summer makeup tips for... Read more

    10 hours, 35 minutes ago by   Sugandha Choudhary
    HAIR & BEAUTY, LIFESTYLE
  • A Very Nice Day

    Very Nice

    Thursday dawned bright and clear and rather cool -- a perfect day to be outside! Shelia, my friend since 7th grade, was in town and offered to come over and pul... Read more

    12 hours, 44 minutes ago by   Vickilane
    CREATIVITY, PHOTOGRAPHY
  • 33, And Counting…

    Counting…

    I have 33 job applications out there. …Have taken 5 Interviews so far, and every day at work is like trying to survive a crawfish boil…as a fucking crawfish. Read more

    13 hours, 19 minutes ago by   Shewritesalittle
    CREATIVITY, SELF EXPRESSION
  • Hypermasculinity – Sometimes It’s Not All About The Girls

    Hypermasculinity Sometimes It’s About Girls

    16th December 2012. A 23-year old student was not just gang-raped but tormented and beaten in the most barbaric way possible on a moving bus. Read more

    14 hours, 36 minutes ago by   Scribe Project
    SELF EXPRESSION

Magazines