Wisdom of the Crowd vs. Venture Capital Startup Funding

Pre IPO Swap – 10/16/2022 — Startups are one of the hardest business activities in Capitalism and also one of the most valuable.  Small businesses create the most amount of new jobs, not to mention efficiencies, and new markets.  Raising capital is even harder, when you don’t have a track record or anything to show for your idea on a napkin.

This is where traditionally Venture Capital has taken a major role.  Typically VCs have not only the capital but the experience to know what to do and what not to do, in order to make your startup successful.  But in exchange for that, VCs typically get a majority stake, a board seat, and possibly have one of their own have an executive position, making sure their investment is managed well.  This works well in many cases but isn’t always a good fit for startups.  Also, VCs only invest in a small percentage of deals shown to them, leaving many founders out in the dust.

Then came the Jobs Act:

What Is the Jumpstart Our Business Startups (JOBS) Act?
The Jumpstart Our Business Startups (JOBS) Act is a piece of U.S. legislation that was signed into law by President Barack Obama on April 5, 2012, that loosens regulations instituted by the Securities and Exchange Commission (SEC) on small businesses. It lowers reporting and disclosure requirements for companies with less than $1 billion in revenue and allows the advertising of securities offerings. It also allows greater access to crowdfunding and greatly expands the number of companies that can offer stock without going through SEC registration.

KEY TAKEAWAYS
The JOBS Act loosens regulations on reporting, oversight, and advertising for companies trying to raise investor funds.
The law allows companies with under $1 billion in revenue to disclose less information to investors.
The law allows non-accredited investors to invest in startups through crowdfunding and “mini-IPOs.”

The intended goal of the JOBS Act was to revitalize the small business sector after the financial crisis, helping entrepreneurs start businesses, grow current businesses, and putting Americans back to work.  Deregulation under the JOBS Act helps businesses access funding but also increases the risk of investors being victims of fraud.

Under the Jobs Act, many broker dealers offered Crowdfunding platforms that allowed young companies to raise capital to retail investors, and this could be advertised online.  There are rules and limits of course, but the Jobs Act was and is huge for startups.  Checkout this clip from BBC Documentary “Wisdom of the Crowd”–

The idea is that the Crowd has wisdom more than any individual, if you take the mean average.  Whether you accept this theory or not, Crowdfunding has taken off.

According to Fundera, Crowfunding accounted for $17 Billion in funding in 2020: [2]

Crowdfunding Statistics: Overview
$17.2 billion is generated yearly through crowdfunding in North America.
Funds raised through crowdfunding grew 33.7% last year.
There were 6,455,080 worldwide crowdfunding campaigns last year.
Successful crowdfunding campaigns have raised $28,656 on average.
The average amount raised by all crowdfunding campaigns last year was $824.
22.4% is the average success rate of crowdfunding campaigns.
Overall crowdfunding projects have an average of 47 backers.
Fully funded crowdfunding projects have an average of 300 backers.
The average pledge for fully funded projects is $96.

It’s capitalism at it’s finest – providing the masses with access to markets.  It’s by no means guaranteed capital, only 1 in 5 Crowdfunds succeed (and their definition of success is probably very low).

Crowdfunding is for the masses, not the classes.

So as you can imagine, the classes have drummed up a smear campaign.  The VCs in particular spread myths and rumors about Crowdfunding, because let’s face it – if companies raise capital on Crowdfunding platforms, they don’t need VCs.

There are many Crowdfunded startups that have exited, and/or become huge success stories – here are just a few.

For Crowdfunding your startup, see Reg CF @ LevelX.

REFERENCES

[1] https://www.investopedia.com/terms/j/jumpstart-our-business-startups-act-jobs.asp
[2] https://www.fundera.com/resources/crowdfunding-statistics
[3] https://blog.thecrowdfundingformula.com/crowdfunded-businesses/

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