Roger Ehrenberg

Venture capital vs. crowdfunding: Let's get real

April 3, 2013: 8:28 AM ET

Not all money is created equal.

By Roger Ehrenberg

Crowdfunding is all the rage. Even the SEC recently blessed one type of crowdfunding for which there was risk of an enforcement action. Several in the early-stage ecosystem have called for venture capitalists to "up their game," as alternative paths to financing create competitive threats to both incumbent firms and the venture model itself. I think drawing parallels between crowdfunding and VC investment is inappropriate -- conflating several important factors, most of which have to do with whether a founder is dealing with a good VC partner or a lousy VC partner.

There will always be good VCs and bad VCs from a founder perspective, and the presence of crowdfunding is unlikely to impact this phenomenon. That said, here is the compare/contrast as I see it between crowdfunding and VC funding (assuming one is dealing with a quality VC who acts as a true partner with management).

Please note that I am not looking to specifically address of whether crowdfunding may or may not be a good vehicle for accessing early-stage investment opportunities. I will say, however, that if one's investment thesis generally revolves around the notion of "social proof" than I don't hold high hopes for this corner of the asset class.

1. Mentoring and assistance

  • VC: High
  • Crowdfunding: Low

With younger first-time founders, I believe money is not fungible and that there is significant value to partnering with a great individual at a great firm. I have personally witnessed this as a founder, as an angel and most recently as a VC. Whoever says that "all money is green" isn't giving the inexperienced yet visionary founder very good advice. I believe this talk is a function more of ego and bravado than really trying to give a founder the best advice for building a sustainable, long term, profitable business.

Cynics will say "Oh, you're just talking your book." My response: Come back with a thoughtful argument and save the platitudes. I also acknowledge that many founders successfully build a suite of mentors and advisors both inside and outside of their funding syndicates, but I don't see these relationships as a replacement for a VC operator that has interests and exposures closely aligned with those of the founders.

2. Stability

  • VC: High
  • Crowdfunding: Low

Most seed stage businesses with which I've been involved have not been "up and to the right" propositions from the get-go. It has taken a bunch of time -- invariably more time than expected -- to achieve product/market fit and, more importantly, to figure out a scalable and replicable way to sell the product. And with this extra time comes extra financing requirements, often more than the start-up has on hand.

Because of this, in purely angel-funded situations (and, by extension, crowdfunded situations where there is no ostensible deal lead with the responsibility and resources to bridge the gap), it frequently is either time consuming or impossible to secure this incremental capital prior to Series A-type metrics being hit. This is only one of the ways where a supportive VC partner can help keep the team focused on execution by injecting enough capital to hit the key operating milestones Series A investors are looking for. And this can generally be done quite quickly and painlessly, but has to be done in an environment of trust and support. It is important that both founders and the VC feel a bridge investment was done fairly and thoughtfully, but this is something that strong VC partners do every day. It's part of life.

3. Friction

  • VC: High
  • Crowdfunding: Low

As crowdfunding platforms become increasingly turn-key and the information provided becomes better, it will become easier and easier to tap a broad array of accredited investors for start-up capital. VCs, regardless of how streamlined their process might be, will always represent more friction and require more effort in order to close a round. They will ask more questions. Spend more time. Likely distract to a greater extent. But, in my experience, this process is often healthy for the start-up founder and forces a level of self-awareness, insight, professionalism and transparency that did not exist previously.

For more seasoned founders this might not be seen as valuable, and the more streamlined crowdfunding process might be more appealing. In fact, as I see it crowdfunding appears most appropriate in two distinct circumstances:

  1. 1. Where the money raised is to hack together a prototype, and the focus is purely technical and not on business-building; or
  2. 2. Where the money is raised from a seasoned founder who doesn't value the tangibles and intangibles offered by a VC, and really does view dollars as fungible.

Roger Ehrenberg is founder of IA Ventures. He blogs at InformationArbitrage.com

  • Facebook's key investor relations question

    Should raising money be a blood sport?

    By Roger Ehrenberg, contributor

    Andrew Ross Sorkin's missive today on mistakes made in the Facebook (FB) IPO has given rise to some strong emotions. While Andrew sought to lay much of blame at the feet of Facebook's CFO, some others view the CFO's responsibility as simply being to get the highest price for the shares offered, and in that light David Ebersman did an absolutely flawless job.

    I MORE

    Sep 4, 2012 10:43 PM ET
  • Jamie Dimon failed Crisis Management 101

    JP Morgan CEO Jamie Dimon strenuously denied that a trader's positions may have been problematic before he had investigated it. His bravado backfired.

    By Roger Ehrenberg, contributor

    FORTUNE -- With the web afire with criticism over JP Morgan's recently announced (and unexpected) $2 billion trading loss, a few "life lessons" came to mind as to how Jamie Dimon - and his PR department - bungled this badly:

    Know the facts before taking a MORE

    May 11, 2012 11:29 AM ET
  • A message for early-stage companies

    Block out the noise. The key to getting through unsound times is to maintain sound thinking.

    By Roger Ehrenberg, contributor

    The public markets are in panic. Global exchanges are getting crushed, with high-quality issues getting sold along with weaker securities. Cross-market correlations are trending towards 1. Gold is hitting new highs. This is not a pretty picture. And perhaps even worse, there are no easy solutions. "QE3" or other Government-sponsored measures to flood MORE

    - Aug 9, 2011 8:05 AM ET
  • Creating competitive advantage through data

    Companies must recognize the value of their data, even if the data isn't "big."

    By Roger Ehrenberg, contributor

    I've been focused on investing in data-centric businesses for almost eight years, during which my view of what generates true competitive advantage through data has changed. Where tools and technologies for data storage and management once weighed heavily on my mind, the applications and business models for erecting barriers around proprietary data assets currently MORE

    Jul 21, 2011 12:00 PM ET
  • Entrepreneurs are from Mars, VCs are from ... Mars

    Entrepreneurs often think there is a massive power imbalance between themselves and the venture capitalists. This is hardly the case.

    By Roger Ehrenberg, contributor

    This is yet another missive on my growing awareness of the complexities and challenges of the venture business. More specifically, how to be a good investor and steward of limited partner capital while being respected, and, in fact, sought after, by entrepreneurs, most of whom you will leave MORE

    Jul 7, 2011 8:54 AM ET
  • The real-time web (a.k.a. Wall Street 2.0)

    Early glimmers of the real-time Web could be found on Wall Street more than 20 years ago.

    By Roger Ehrenberg, contributor

    I have spent two decades at the intersection of real-time data and technology. Things that absolutely amazed me on Wall Street -- real-time stream processing, massive databases of well-structured and indexed data, co-location -- amaze me no more. The funny thing is, however, that much of the stuff that Wall Street MORE

    Jun 9, 2011 1:39 PM ET
  • Financing a start-up? Ask yourself these three questions.

    You need to understand your business requirements before figuring out how much to raise and from whom to raise it.

    By Roger Ehrenberg, contributor

    "How should I finance my start-up?" is a common refrain from first-time founders and serial entrepreneurs alike. There is no manual for how to best do this, and intuition can only get you so far in the absence of experience and mentoring. As with investors evaluating start-ups, it MORE

    May 19, 2011 12:37 PM ET
  • Don't hate on VCs...

    Entrepreneurs are doing other entrepreneurs a disservice when they badmouth venture capitalists. So stop it. 

    By Roger Ehrenberg, contributor

    …just the ones who deserve it. VC bashing, like bubble-talk, is clearly in vogue. A good friend and co-investor of mine, Jerry Neumann, tweeted the following:

    Some entrepreneurs are so paranoid about VCs that I think it would be easier to communicate with them if I actually were an asshole.

    I've gotta say, I completely understand MORE

    Apr 29, 2011 3:20 PM ET
  • Beyond Facebook: Private market regulation is in need of rationality

    Weakening the already-broken accredited investor rules would only lead to greater numbers of fools rushing into private companies at precisely the wrong time.

    By Roger Ehrenberg, the founder and Managing Partner of IA Ventures

    The SEC's recent announcement that it is considering softening the rules for selling private company stock has brought out the pundits in force. Even my friend Fred Wilson has weighed in. The deeply-held views range widely, from "This is a MORE

    Apr 12, 2011 6:36 AM ET
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.