The
Jumpstart Our Business Startup, or JOBS, Act of 2012 will make it possible for
companies to raise up to $1 million by tapping individuals through online
portals, just as soon as the Securities and Exchange Commission has written the
rules for these investments. Some observers claim that equity crowdfunding –
these efforts to raise small amounts of equity from many people to finance a
business – will "spell trouble for the guys on Sand Hill Road" and
"quickly push aside more traditional capital providers like bad VCs."
I
disagree. Equity crowdfunding is not a substitute for venture capital.
Different entrepreneurs starting different types of businesses will raise money
from equity crowdfunding than those who have traditionally tapped venture
investors.
For
equity crowdfunding to be a substitute for venture capital, entrepreneurs that
would have tapped venture capital will have to bypass them and raise money from
the public directly through crowdfunding portals. That's implausible for many
venture-backed companies. The median venture-capital investment was $4 million
in the first three months of this year, Dow Jones reports. The typical
venture-backed business can't switch to equity crowdfunding to raise the money
it needs because entrepreneurs won't be allowed to tap more than $1 million
through that avenue.
Many
startups seeking less than $1 million will still favor venture capitalists over
the crowd. If additional fundraising is in the cards, having one or two large
investors will prove much less cumbersome than having numerous small ones. If
they aren't doing well, managing the dissatisfaction of one investor will be
easier than dealing with numerous upset financiers.
Read more: http://www.entrepreneur.com/article/228738