Crowdfunding Will Change Venture Capital Forever

Technology is indeed democratising access to resources, previously accessible only to a select group of people: access to information, transparency and accountability. But what if technology has the same effect on investing? If you look closely – it already has an immense effect. According to a report by Massolution, crowdfunding will exceed VC investments in 2016. Nick Tommarello, chief executive and founder of a crowdfunding platform WeFunder, took the stage at Startup Turkey to tell us why this matters and what questions we have to answer.

At hindsight, crowdfunding is basically a mix of collaborative economy, technological solution and modern finance. It takes away all the downside risk of adverse selection and allows anyone from anywhere (not only those in the Valley), to have access to great companies around the world. All this would happen by creating a single purpose vehicle – where all investors would pull funds into one fund that makes one investment. So it is functioning more like one large angel investor when writing a $200,000-$500,000 ticket.

There are a couple of things (mainly regulatory) that hinder the growth of crowdfunding. For one, there is an investor limit to each vehicle (WeFunder has a limit of 99 investors), a crowdfunding platform can’t advertise (financial regulation) and only certified accredited investors can commit capital (those who have more than $1 million in net worth or $200,000 in annual income – basically excluding most of humanity). Yet according to Nick, all of these limitations are going away through smarter laws and brokered compromise. In light of these events, it’s important to answer several questions on how this will affect investing in general.

How Will This Affect Fundraising Options?

 As of now, companies have several choices – either to go public through an IPO, or to remain private and face less regulatory burden. Crowdfunding blends these two together, by saying that one can invest into risky companies, yet put only small fractions of income. The fact that everyone can invest in these companies pulls private companies closer to being public, or at least raising from the public.

How Will This Impact Venture Capital?

What exactly will happen when crowdfunding will deliver more than $5 million in 24 hours, while venture capitalists would be still researching the market? The answer is clear – as more funding will become available, VCs will be pushed to later rounds, with smaller returns and smaller risks.

What Happens When We Train More Founders?

Conventional wisdom says that VC can’t scale, but that’s only because of the number of founders we have and because of the experience those founders have. As a rule of thumb, experienced founders receive more in funding. What happens when crowdfunding will allow founders to raise money for multiple, maybe smaller, maybe local, but multiple ventures? What happens when the number of serial entrepreneurs will grow exponentially?]]>

─ March 31, 2016