The VC Myth: VC vs Equity Crowdfunding
Selective VC Investing
In 2015, venture capital funding reached nearly $58.8B nationwide, with the top percent invested in the software industry. At first glance, that number may seem quite promising, but the amount of companies getting a chunk of that $58 billion is actually fairly small.
VCs are extremely picky when it comes to which startups they are going to fund, and they should be; these VCs are gambling a lot of capital on just a few companies. Therefore, they must carefully select companies that they discern will produce the best returns. Venture capital firms have various reasons why they decide to pass on projects. Reasons can include the company being in the wrong industry, being referred to by the wrong person, or having little proof for potential success. Sometimes rejection does not have to do with the startup’s idea or business plan. Also, being lucky enough to receive VC funding does not guarantee the future success of a business.
VC’s Fund a Small Percent of Businesses
An issue with VCs picking and choosing which companies to fund is that they dismiss ideas — great ideas. Most businesses ventures never receive VC funding. Let’s say 100 business plans are presented to a VC. Of that original 100, only one or two fortunate companies will be chosen to get funded; therefore, the other 98–99% of start-ups fail to receive a financial boost.
“[The few VC success stories] can lead other entrepreneurs to think that this is the only model for success, that there is no other way to build a major company, and that they should write business plans, attend VC conferences, seek VC, and give VCs control of their venture” –Dileep Rao
Another Option: Crowdfunding
Crowdfunding has quickly become the new way to fund business dreams throughout the country. With Kickstarter hitting just under $2.5B raised and as equity crowdfunding continues to gain popularity in the US, the current environment is fantastic for raising caital.
For a perfect example, look no further than Pebble, an E-Paper watch for iPhone and Android. After an slightly successful seed round raising $375,000 in angel funding, founder Eric Migicovsky failed to get any VC firms to back his Series A round of funding. VC’s claimed that his hardware startup was “too risky” and wanted no part in it. With no options left, in 2012 he tried his luck with crowdfunding.
To his surprise, Migicovsky received over $10.2M (far exceeding his original $100,000 goal) from 68,928 backers, providing over 100 times what he had originally hoped to raise. Trusting that they would again receive the support from crowdfunding, Pebble launched a second generation of their watch called Pebble Time a year later. The results were jaw dropping. Pebble Time holds the record for the most funded Kickstarter campaign: over $20 million raised. Further, just last month, they launched a third Kickstarter campaign for Pebble 2.
Migicovsky legitimized a business that was consistently shot down by VC after VC. This successful crowdfunding campaign gave Pebble an instant consumer base, effectively scaling the business much further and faster than would have been possible with the original Series A funding that they had hoped for.
The future of financing ventures with equity crowdfunding is a new industry that is evolving rapidly. Thanks to the passing of the recent Title III regulation (or Regulation Crowdfunding), equity crowdfunding is legal for the general public. Crowds of investors can now use funding sites that act as a middle man to reach companies they believe in. Equity crowdfunding sites like our own, StartEngine, allow companies to finally raise the capital they need without relying on Venture Capitalists. 58 billion dollars is going to look incomparable in the months and years ahead, and venture capital firms everywhere should be aware. Crowdfunding is here, and it is not leaving anytime soon.
The views and opinions expressed in this article are those of author Hailey Hite. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:https://www.startengine.com/assets/Disclaimer.pdf