2013-03-07 | Jean-Pierre Pequito Share this article:

Last day on Reddit I stumbled upon a Washington Post article with a bold title: “Venture capitalists prepare for the impact of crowdfunding”. Right after, I started remembering how many times I was told to go for crowdfunding instead of raising a round from angels. It was another call for the crowdfunding hype as the new way for funding startups.

I beg to differ that crowdfunding is an alternative to venture capital. VCs are aimed at companies in growth stages which have some kind of traction, while crowdfunding is an alternative to informal or angel investment in early seed rounds. They bring bigger amounts to the table and often for non-fancy consumer products. The biggest difference though is professional investors judge businesses while the crowd judges products.

Don’t get me wrong. Crowdfunding is growing and is allowing many companies to get funded outside the hard cash from informal or institutional investors. It’s good to have new funding models. But it’s far from replacing the traditional ones. Many people have misconceptions on crowdfunding, often seen as a quick and easy alternative.

We started as a non-profit platform and it was crowdfunded by our users. At that time we didn’t really call it crowdfunding but donations, but today it sounds cool to say crowdfunding. However I remember it was far from easy. I spent a lot of time raising donations to just cover our costs for the next year. Handling rewards, mass emails, landing page, personalized messages, update covers, testimonials, track progress, and so on. It was all for a fairly small amount and for a conversion rate of close to 1%.

Now we are scaling and crowdfunding is not an option for our startup. Here are my reasons:

We are a website platform. Crowdfunding is not for all kind of (consumer) businesses. It works with small amounts from large crowds. This means you need to attract many potential customers and have high conversion rates. Crowdfunders are in fact early adopters shopping for appealing products like a new cool gadget or a revival of a classic videogame. Just cash. Forget the smart money if you go for crowdfunding instead of angels. It’s the equivalent of funding your product development with early sales. However, startups need more than just cash. Raising money from informal investors who have certain expertise in your sector can open many doors. Their network, introductions, experience and advice bring more value than the working capital in seed stage startups. We are too early. You need to show the crowd a fairly finished product before people start opening their wallets. This makes it hard to apply lean principles on finding a scalable business model. If you manage to successfully raise funds you know you are on to something, but raising from the crowd is often just a one shot trial. They have to get what they paid for. Resulting in limited options to iterate or pivot. It requires a lot of effort. Many people believe that placing your almost-finished product on Kickstarter, Rockethub or Indiegogo will make the magic happen and get you funded. In reality you will need to spend a lot of time driving inbound traffic to your profile, nailing the presentation, creating great visuals (especially videos) and keeping it updated with your progress. Imagine how hard it is to create traffic to your blog, and now how much to get them to buy your unfinished product or just a vision. We need a big network. And many Facebook friends. The majority of backers are friends and family. Only a very few get strangers buying. Those are the success stories we all hear of, after they’ve gone viral, which of course are just very few. Often we see many endorsements in videos or the founder being a celebrity hero in his market, for example Brian Fargo with the Wasteland 2 game. And let’s not forget the media coverage you need, to grab some attention from users…

Crowdfunding is a great model for sectors that are often not very appealing to professional investors. Yet we have to see how equity crowdfunding evolves, I remain skeptic of whether it will have a real shot at replacing the traditional investment process. In fact, internet and crowdfunding platforms allowed many companies to reach out to more customers and sell products before being produced. But founders still rely on credit cards, bank loans and financing from friends and family.

As for us, crowdfunding was not the best option.

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