This article is written by Munira Hussein, a Contributor Author at Startup Istanbul.
With so many developments, setbacks, changes and transformations going on in the entrepreneurial industry, you must be wondering what the state of the crowdfunding and venture capitalism is like and what it’s future might be.
The current state of the crowdfunding industry is that there are dozens of crowd funding platforms that exist around the world. Despite the existence of numerous platforms, it is only three of them that truly matter. These are AngelList, FundersClub and Wefunder. The reason is that these three companies did all the work necessary to make sure there is no downside, risk for the startup founder to accept crowdfunding money. They solved the problem of adverse selection.
They do these in several ways. They create a single purpose, vehicle and all the investors around the world will put their funds into this one fund and make one investment into the startups. From the founder’s perspective, they act as one large angel investor that delivers two hundred to five hundred thousand dollars in a week or two and if they didn’t do it this way with one fund, no startup founder would want to work with them.
Right now, crowd funding is best used to top off a round, typically they raise about 100million dollars in face to face meetings with investors, and then reserve 30-40% for crowdfunding platform, it makes things a little faster and easier. However, this is not very innovative. It increases the chances of a lapse and the investment of the money raised from crowd funding is not maximized.
It has the advantage that people who are wealthy and outside the Silicon Valley can invest in startups which would have been impossible a few years ago. For a long time, most investors have had to come from the Silicon Valley. Numerous startups have had to go to the Silicon Valley in order to be successful. Even now, there is an aspect of truth in that but it has become easier for entrepreneurial sectors to rise from several parts of the world such that even Silicon Valley is looking to the rest of the world for ideas and startups.
For crowd funding and venture capitalism to hold water and play its purpose in the entrepreneurial sector, there is need for research and investment based on information. Crowd funders should avoid the problem of adverse selection at all costs. By creating a pool of funds and providing the necessary and accurate information to startups that are looking for investors, they increase the chances of catching and growing the right startup hence increasing the chances of profit as well as value creation.
