Equity crowdfunding is doomed as an asset class (opens in new tab)

Some points of disagreement:

- Startups choose either crowd-funding -or- VC. It's not VC or crowd. Nor is it angel or crowd. High quality startups can raise traditional seed rounds and allocate a slice of that round for a crowd of investors. One example is Zenefits (YC W13), which is an awesome company that's kicking ass (IMO). They raised part of their round on Wefunder even though they had tons of investor interest after Demo Day.

- The author assumes the investor selection will be inherently poor with crowd-funding. I disagree with this, too. The universe of great investors isn't a subset of investors active enough to angel invest. Imagine being an API company and having 50 developer-investors.

Plus, crowdinvesting platforms allow investors to invest smaller amounts in many companies. Imagine investing $5k in 20 of your favorite YC companies. Good luck trying to get one-on-one meetings for $5k checks. Especially if you don't live in San Francisco.

- The author assumes that raising from a crowd means you'll have to wrangle thousands of investors. It doesn't have to be that way, especially with the common practice of using LLCs to group many small investors into one item on your cap table.

- I do agree with the author that too much adverse selection can create a marketplace for lemons. I worry about that all the time. However I think we do a pretty good job of mitigating that.

There will absolutely be a lot of mediocre crowdinvesting platforms and companies trying to raise on them, but it doesn't mean the whole industry is doomed. I encourage the author to check us out in a month once the general solicitation ban is lifted and reconsider his view of crowdfunding as an asset class. :)

Let's see if we can focus on the reasons why his arguments are wrong, not just that he is a VC.

Valid reasons why he may be wrong:

- He argues that good startups have no trouble raising VC. On the contrary, many VCs have poor ability to determine what is a good investment, and many good startups have war stories to tell of how difficult their first financing round was. Therefore, crowdfunding could benefit good startups because raising money from VCs is not easy even for quality startups, because VCs are (as a class) not particularly good at identifying quality.

- Investor selection: sure, getting top-tier VC has soft benefits. But there are costs as well: VCs have more board power, can often force a founder to step aside, or will force a sale to liquidate equity to distribute returns to LPs. Yes, individual investors may not add as much "soft value". But the power dynamics are different and in some ways there may be lower risk to the founder.

- Later stages: so what if crowdfunded companies don't turn to crowdfunding for second rounds? Crowdfunding will work best for early stage. If the business turns out great, and the company needs large amounts of follow-on funding, then getting $20mm from institutions will be more feasible. But it is difficult to understand why that's a serious problem for earlier stage crowdfunding.

- Marketplace for lemons: information asymmetry also exists for VCs with startups, so the lemon argument against crowdfunding is not unique versus VC.

In short, these are interesting ideas against crowdfunding, but none stand out as particularly compelling, or they can at best make a claim against crowdfunding for certain types of deals, rather than against crowdfunding as an asset class.

I don't really think the "good startups will opt for VCs, ergo only bad startups will go for crowdfunding" line of argument is really convincing. The reason being that how good or bad a startup is isn't really a knowable quantity both because it's an incredibly vague, meaningless concept and because at the funding stage not much about the future of the company is pre-determined.

That said, I do think the crowdfunding movement (equity and otherwise) has a major, often overlooked, negative. It's much better to have to deal with one or two VCs than be beholden to a dozen, or in the case of Kickstarter, tens of thousands of stakeholders. A good VC will let you drive the company and only provide high-level guidance and a rolodex, but an active community of a few thousand backers who don't want to lose their money will put your head on a pike if you don't deliver exactly what they were promised. (And odds are many of them have a completely different idea of what they are paying for than you do.) Good luck to you if you want to pivot once you have 10,000 backers on Kickstarter, for example.

However, if you have a very straightforward project that is well specified and has a concrete way to measure when it is completed or failed, like shipping a piece of hardware that is completely designed, if lack of capital is a blocker, crowdfunding seems to make sense. For more open ended projects like games or software applications I see Kickstarter has a horrible idea unless there are literally no other options. And even then, it might be worth it to just die instead of having to become beholden to thousands of people on a project you may lose interest in or won't be able to kill even when the writing is on the wall since it will destroy your reputation.