Raising Capital from Secondary Markets Versus Venture Capital Firms

Published: 4/28/2011 9:07:13 AM

There is talk these days of some of the secondary markets beginning to offer the ability for startups to raise money from a wide variety of participating investors - crowdsourced financing.

While this sounds interesting to contemplate, entrepreneurs should be wary of these marketplaces in at least one respect: if you think you will need additional financing later on from institutional VCs, having dozens or even hundreds of small investors may permanently preclude institutional venture capital from coming in.

The reason is straightforward - VCs generally prefer simple capital structures and the cost and complexity of getting a large number of disconnected investors on the same page for additional follow-on rounds could be a deal killer.

So, as these "crowdsource" funding opportunities arise in the near future, consider all the possible ramifications before sourcing funds in this manner.



Don Jones
CEO, VentureDeal

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