There is a lot of talk about whether crowdfunding is a viable source for business funding. Small businesses we speak to daily are largely confused by online marketplaces and crowdfunding practices.
Typically, crowdfunding using online platforms such as AngelList, Tilt, Kickstarter or Indiegogo is for start ups. New insights from Kevin Laws, Chief Operating Officer of AngelList emerged last week at the SEC Government Business Forum on Small Business Capital Formation. Mr Laws gave some excellent insights for businesses in general on crowdfunding.
Perhaps the most enlightening insight from Mr. Laws’ presentation was the fact that crowdfunding isn’t what you might think it is, or what you’ve been led to believe it is by hyped up articles in the media. Speaking to lots of small business owners, I can tell you they tend to think of AngelList as hundreds of people contributing with small amounts of capital.
Quite the opposite is true with almost two-thirds of AngelList deals having 40 investors or less.
Further evidence that small business start up funding from platforms like AngelList are moving away from being broad public funding to private invite only syndicates is evident in findings presented by Mr Laws. His findings show that most funding is private (97%) with much of it limited to a private list. 46 percent of deals are invite only, up from 37% only six months earlier!
So what can small business learn from these trends?
Firstly, crowdfunding is more like private group funding and really more like syndicate funding on AngelList. Secondly, while funds raised on AngelList is paid for by equity in your business, you should seriously consider all small business loan options before giving up equity to dozens of people that don’t know you and vice versa. Seeking funding from the crowd may be easy yet the crowd can turn into a vocal mob just as quickly. Funding your business through alternative business funding companies such as United Capital Source insure that there is a 3rd party in the transaction, avoiding the traps of crowdfunding.
There may be businesses that feel that online platforms in lending are democratizing the business funding process more than working with an individual funding company. At United Capital Source, we have provided over $100 million of small business loans in 2015 to thousands of businesses from a wide range of industries.
We work with private funding sources as well as public sources in order to find the best funding program to suit your needs. Our finance team can give you a FREE consultation by phone, review your financials and advise on the business funding application process.
Online platforms attempt to automate this process and if you don’t fit into their process, have bad debt or a history of credit problems you can lose out in a robotic world of electronic processes for loan approvals. We accept all established businesses, even those which don’t appeal to syndicate funding groups on crowdfunding platforms.
One of the so-called short comings of offline funding channels claimed by online marketplaces is that many small business owners end up taking out loans they neither understand nor can reasonably repay. While ‘caveat emptor’ (buyer beware) is required in most business transactions, online marketplaces for funding small business are rapidly becoming more concentrated with sophisticated investors than once thought. So what is the difference?
Syndicates (or as sometimes referred to as ‘Pop Up Venture Capitalists’) on AngelList are led by usually a well known angel investor who then privately invites others to join them in the round of funding. The big difference between specialist offline business funding companies and online syndicates like those on AngelList is that our selection criteria of who to fund is rigorous. Years of experience and relationships with lenders across America are what is required to bring to small businesses the a wide variety of funding options as opposed to online syndicates in which the lead syndicate manager takes a 15% carry on fee.
With AngelList rapidly becoming a platform for private investors to use for “invite only” investment peers to fund new companies, we predict there will be more concentration of investors on such crowdfunding platforms. Small businesses across America still like to speak to a financial specialists in business funding, talk about their business needs, funding options, understand repayment schedules and other terms of the funding program.
Online crowdfunding definitely has its place in the lending eco-system yet should be understood fully by small businesses when considering small business funding options.