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.
It’s More Exclusive Than You Think
Typically, crowdfunding using online platforms such as AngelList, Tilt, Kickstarter or Indiegogo are for startups. 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. It’s not what you’ve been led to believe it is by hyped up articles in the media. In our line of work we speak 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 startup 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!
What Has AngelList Taught Us?
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. The 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. 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 insure that you avoid the traps of crowdfunding.
Syndicates on AngelList are led by usually a well-known angel investor who then privately invites others to join them.. 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. This is what is required to bring to small businesses a wide variety of funding options. Online syndicates work where the lead syndicate manager takes a 15% carry on fee.
AngelList has 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 specialist in business funding. They like to talk about their business needs, funding options, and understand repayment schedules. They also like to ask about any other terms of the funding program.
Online crowdfunding definitely has its place in the lending eco-system. However, it should be understood fully by small businesses when considering small business funding options.