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Tuesday, November 5, 2013

Why Equity Crowdfunding Isn't a Threat to Venture Capital

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.

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