Yes, crowdfunding is cool. It's democratic. It's disruptive. And it's a bad idea for a lot of start-ups.
There are two completely different ways of looking at crowdfunding. It is either a) the best thing to happen to start-ups since Red Bull; or b) while sometimes useful, it’s no serious substitute for other sources of money, including family & friends. Even bootstrapping.
This may not endear me to some of my friends, but increasingly, I lean towards the latter.
Yes, I know, I know. Crowdfunding is revolutionary. It lets you raise funds without sacrificing ownership or having to face relatives across the table at holidays, or needing to promise a return besides a free sample of your product or some other “reward.” At least until the SEC weighs in with rules on how you can crowd-source equity investors, you don’t need to do much of anything to apply for that money except create a decent color scheme and tell a nice story. Even so, crowdfunding has drawbacks. Here are three:
1. It makes it too easy to kid yourself
Ever written a business plan? If you have, you know how much painstaking thought you have to put into crafting mission statements, identifying supply chains, forecasting sales and determining costs, etc. It’s like going to college--you put in the effort to show what you’re capable of. Granted, not every professional investor will demand a business plan, as such, but all of them will demand to get under the hood of your business proposal. Until you’ve validated every decision you made in creating your company and developing your product, you’re not getting anywhere with them.
With crowdfunding, it’s a bit different.
Even if you have a real business in mind--as opposed to, say, a campaign to cover your expenses while you study art in Florence--you know one thing: No one on Kickstarter, Indiegogo or their imitators is going to ask you to estimate your cost of customer acquisition or the size of your potential revenue streams or any other tough business questions.
Yes, running the numbers is hard, let alone using those numbers to win over skeptical investors. But there’s a reason for that. Business is hard. Convincing real investors that you’ve got what it takes is your company’s first reality check. Crowdfunding can let you postpone reality, but not indefinitely. It’s better to ask the hard questions before you’ve burned through a year of your life and $100k of other people’s money.
2. It isolates you from people who can actually help you
Raising money from professional investors forces you to be think hard about your company and be honest with yourself. But it also gives you the benefit of having real, seasoned experts thinking hard about your company, too.
A seasoned angel or VC can help you decide, say, whether to incorporate, how to cope with a cash crunch (which you will have, trust me), and where to turn for advice about a thorny business development question. Crowdfunding may connect you with seed money, but ultimately your company stands a higher chance of success with the benefit of the tactical savvy, strategies for market capture, and smart financial practices that a seasoned investor can provide. Also, a well-connected veteran with a serious stake in your success can open doors that a pack of starry-eyed strangers chipping in $50 apiece simply cannot.
3. I'd never recommend investing in a crowdfunded company. What does that tell you?
I recently reviewed a crowdfunding proposal from a company that makes nutritious snacks using a global supply chain in West Africa. The company is looking for $50,000 on indiegogo.com to fund production. The campaign offers 11 contribution categories, with perks ranging from a personal thank you on their website to a weekend in Napa complete with wine tastings, hikes, and quality food.
After researching this company's team, it became apparent to me that no one had any financial experience. In fact, only one team member had any qualifications listed on the crowdfunding site at all. If you are serious about starting and building a company that lasts, why would you want to surround yourself with company like this?
Realizing your dream as an entrepreneur is hard. Crowdfunding sites, in my opinion, distort the dream. Granted, funding can help supplement other sources of money and help you try out a product, but the true test of a business is what happens after the funding is done. And that’s when you’ll need the discipline, expertise and sense of urgency that comes putting your own money at risk or that of serious investors who expect a real return.
ARI ZOLDAN is a journalist, entrepreneur and start-up specialist. He is founder and CEO of Inc 500-honoree Quantum Networks, a tech and media incubator in New York, and holds press credentials at the UN and on Capitol Hill.