Peter Thiel makes a comment in his book Zero to One “If you have invented something new but you haven’t invented an effective way to sell it, you have a bad business – no matter how good the product” which got me thinking about crowdfunding. I was chatting with someone over the weekend who had sent me another invitation to a crowdfunding web portal that connects businesses with venture capital. As we got talking about it I found myself thinking back to Peter’s comment and realizing that crowdfunding might be working but has the market really bought it? Is it a niche opportunity that will always fill a void because the greater market isn’t sold on it? Do crowdfunding platforms have their work cut out for them before they become a mainstream competitor for capital?
Two other unrelated events got thinking me about crowdfunding and its continued challenges in the market. The first was when I was watching a recent episode of Shark Tank (family ritual) where Mark Cuban blasted a real estate crowdfunding platform for not being able to articulate how they would be able to return funds to individuals that invested $1,000 through the portal. Knowing a little bit about real estate investing myself I couldn’t have agreed more with Mark’s comment about crowdfunding’s problem with liquidity. In fact real estate is a classic investment vehicle that has always had a liquidity problem. It seems that this particular crowdfunding platform hadn’t solved this problem either. The second event was when I met with an entrepreneur in the food space last week (see FarmTable) who said that he was able to get his business to a level of cashflow that would probably allow him to bypass crowdfunding and go straight to a large venture round. So these two events got me thinking: what is crowdfunding really doing? There are crowdfunding sites raising capital and successfully placing it with businesses and ideas but can the model scale truly be sold to the market at large? It currently exists on the fringe of the market but can it sell itself as a mainstream market player?
The concept of allowing smaller investors to aggregate their capital for purposes of making a large investment is a proven concept. In fact there are proof cases where this concept has worked extremely well in disrupting the market including mutual funds and REITs. These markets have become huge and have raised enormous amounts of capital but they also solved two large problems that existed before the market would adopt them: liquidity and education. The public marketplace provided liquidity and networks of investment representatives and dealers provided education. In a short period of time these investment vehicles became the status quo and have not been disrupted since their inception. Will crowdfunding be able to have the same impact on the market? I believe crowdfunding needs to be sold to the market with the same level of commitment and dedication that mutual funds and REITs used. Crowdfunding has to move past the innovator or early adopter stage on the innovation adoption lifecycle by relentlessly showing the market how well it can work. Mutual funds and REITs solved a real problem in the market and built out the business model to ensure they could deliver. But they also had to sell it. Crowdfunding is still working through the business model with regulators, the public, investors and businesses but ultimately those things get sorted out and the real work has to begin – selling it effectively to the market. And as the market becomes more crowded (no pun intended) selling it becomes harder. The size of the pie stays the same but more companies are fighting for a small piece of it.
If you are considering raising capital then you should definitely include crowdfunding in your plans. If you are an investor looking to place funds in good opportunities while maintaining a measure of control over where your funds go, include crowdfunding in your considerations. Crowdfunding is still in its early stages and the jury is out as to whether or not it will remain a niche opportunity or will be successful in selling itself to the market as a true disrupter and player.