Disadvantages of Crowd Funding Your Startup

Published: 10/30/2012 9:32:00 AM, comments: 0

This is Part 2 in a series on crowd funding. (Here is Part 1 - The Advantages of Crowd Funding.)

Despite the many advantages and opportunities available with fundraising through crowd funding, there can be significant downside risks. I've listed five below:

- No stealth for your startup - crowd funding success depends on getting the word out about your opportunity to many potential investors. Unfortunately, this also has the downside of broadcasting your product or service concept at a very early stage, inviting competition. When designing your communications, you will need to walk a fine line divulging enough to get potential investors excited, while not over-communicating and tipping off potential competitors.

- Attracting high-quality employees may be more difficult, since highly qualified candidates may question why you were not able to raise venture capital investment through traditional channels. You'll need to get your "messaging" clear and concise with potential employees. Having a strategy outlined for additional funding, if necessary, will help.

- The potentially large number of investors will require organized and automated communication processes - so you will need to remain vigilant in your communication policies. Understanding what kinds of things you can communicate with potential or existing investors can spell the difference between adequate communication and disgruntled investors.

- With the potentially large number of investors, if your company does not perform as expected, you have a greater pool of disgruntled investors who could potentially bring legal action against you. Crowd funding your company does not necessarily get you hundreds of new “friends". Some investors, particularly ones who have invested larger amounts in your company, may be unhappy with the results. Having a knowledgeable business attorney who is actively engaged in your progress may be worth the extra money.

- If you sell a product and have a large number of orders, you run the risk of not meeting demand in a timely manner, hurting your reputation and brand. A successful crowd funding campaign is only the beginning of producing results for your customers. Your relationships with your company’s service or product vendors are critical in order to ramp up production and/or service features necessary to keep your customers and investors happy.

Next time, I'll have a list of crowd funding "Do's and Don'ts".

Don Jones

Venture Capital This Week for October 19 - 25

Published: 10/25/2012 8:23:03 AM, comments: 0

It's always an interesting week in venture capital. Discover the best stories, blog posts and other information inside the VC ecosystem in the US and in hotspots around the world. Onward dear reader…


Internet VC Albert Wenger has another post up about mistakes startups make in their hiring processes.

Continuations: Hiring Too Fast / Too Show

Startups that hire too fast risk spending money too quickly. Hire too slowly in a fast-growing company and you may never catch up.


The technology startup scene continues to show signs of life in Africa, according to this post:

IT News Africa: Top 5 Venture Capital Firms Targeting Africa

The article highlights 5 venture capital firms that have been in the market for some time, have significant investment activity and focus on ICT industries.


Mikko Jarvenpaa spoke to more than 150 entrepreneur graduates of accelerators to get their opinions on the strengths and weaknesses of accelerator programs.

GigaOm: What Accelerators Do Best and Worst

Among the results: Accelerators help to validate an idea and business model, but don't provide that many industry contacts.


It is said that venture capital firms don't like to invest the "content companies":

TechCrunch: Three Reasons Why VCs Don't like Content

Reason #2: content businesses are a "base hit", not typically a home run investment opportunity that VCs search for.


Xconomy’s BioBeat has a listing of biotechnology focus venture capital firms they think will survive the current challenging environment in biotech investing.

Xconomy: The Young and the Proven

Writer Luke Timmerman believes that biotech funds have such a long time horizon, the investing business is really for the young at heart, especially when contemplating a new fundraise.


Scott Kirsner interviewed David Skok of Matrix Partners for his take on the state of venture capital investing in Boston: A Conversation with David Skok

It’s a lengthy interview that covers a wide range of topics. Matrix is among the best performing venture capital firms in the US.


“A good entrepreneur should always be fundraising,” as Internet VC Nic Brisbourne says.

The Equity Kicker: 50 Questions

Part of a series of answering 50 questions related to venture capital and technology entrepreneurship, Brisbourne thinks that even when not officially fundraising, entrepreneurs should maintain "occasional contact with 10 - 15 of your favorite investors."


Volition Capital VC Larry Cheng writes about how to approach your pitch with his firm.

Thinking about Thinking: Start With the Problem

Cheng says that you should begin your pitch with a description of the problem that is being solved. When he gets into due diligence on a company, he spends as much time validating the magnitude of the problem as he does on the merits of the product.


When you are fundraising, time is not on your side.

Stark Raving VC: Time Kills All Deals

VC Greg Gottesman provides 7 tips to keep your financing efforts on track and not a victim of time.


Which venture capital firms provide the most consistent investment returns to their limited partners?

PE Hub / Preqin: Most Consistent Venture Firms

The analysis cited Benchmark Capital, GGV Capital, Sequoia Capital and Pittsford Venture

Advantages of Crowd Funding Your Startup

Published: 10/22/2012 8:40:44 AM, comments: 0

This is Part 1 of a series on the advantages and disadvantages of crowd funding your startup company.

There are several variants of crowd funding in existence now: donation crowd funding for nonprofit organizations, lending-based crowd funding where money is paid back over time, reward-based crowd funding where investor receives an item or service and equity-based crowd funding where investors purchase a portion of the stock of the company.

Regardless of the type of crowd funding involved, there are a number of advantages in this new type of funding search process:

- Access to a larger pool of potential investors.

- Online services streamline and automate the process of communicating about and receiving investment.

- You can obtain a potential initial customer base for your product or service, even before it is commercially available.

- Company owners may retain greater control over the direction of their company, i.e. no individual large investor asking for board seats.

- If initially successful, a fund-raising effort can increase in size dramatically due to the "social proof effect" of seeing others invest in the company.

- Greater visibility and publicity from a successful fundraise.

- Reduction of funding search efforts enabling company owners to focus on the business instead of fundraising.

- Limited time frame for fund-raising helps owners minimize distraction.

If you've chosen to crowd fund your company, there are a number of Do's and Don't associate with raising capital this way.

Stay tuned for the next post in this series.

Don Jones

Venture Capital This Week for October 12 - 18

Published: 10/18/2012 11:37:17 AM, comments: 0


We've got the best online stories, blog posts and content for the venture capital industry:

The latest dispatch has a number of entrepreneur-relevant articles.

Enjoy and share it with friends and colleagues.


Venture Capital This Week for October 4 - 11

Published: 10/11/2012 10:47:50 AM, comments: 0

We've got the best articles, online content and blog posts for the venture capital industry:

Venture Capital This Week for October 4 - 11

Enjoy and share it with friends or colleagues!


Don Jones
CEO, VentureDeal

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