I wouldn’t fund nor investigate a crowdfunded startup, for three main incompatibilities between the funding models (there are others).
First, upside/downside return expectation mismatch
Crowdfunding is the democratization of the arbitrage of innovation. An oxymoron right off the bat, and the result of venture’s sub-priming after 911 as the counter-response to the self-induced financial bubble in venture capital before. Crowdfunding is the next iteration of sub-priming of innovation arbitrage with money deployed even further towards the protection of downside, not the pursuit of upside venture capital is (supposed to be) interested in. Two utterly incompatible investment trajectories. Alas, false negatives with significant socioeconomic value can be the negative fallout of democratization of innovation arbitrage.
Second, foresight/hindsight investment thesis mismatch
Aside from the provisioning of funds, the only real value of an investor is the alignment of foresight with an entrepreneur (for whatever the reason). Unique foresight is generally absent or drowned in public consensus provided by the democratization of innovation arbitrage. The public wants faster-horses, and could not have envisioned the car, in Henry Ford’s words. Public arbitrage leads to an extrapolation of hindsight at best, not the detection and the daring pursuit of foresight that breaks the norm.
Third, upstream/downstream expenditure mismatch
I’d be skeptical about an entrepreneur’s ability to think big and understand realistic use-of-proceeds needs with the collusion of the public setting the bar of performance. Public consensus funds iterations of downstream innovation driving more affordable price, with a plethora of same-value competitors soon turning the opportunity more subprime. See The trap of “Capital Efficiency” | The Venture Company, written in 2009. Not a viable venture capital proposition and it makes no sense for a venture capital investor to retool a subprime gating proposition into prime.
Avoid subprime
More on this in the first State of Venture Capital ever published, which outlines the root-cause of innovation held hostage by its arbitrage: The State of Venture Capital | The Venture Company, still as valid today as when it was first conceived in Jan 1st, 2010. Yes, the false positives produced by the sub-priming of the arbitrage of innovation are in large part responsible for the enduring rat-race of advertising clicks as the nail in the tire of societal value.
The point is, as an entrepreneur to make an impact and attract prime venture capital, you must conceive innovation that provides significant new societal value from a better and timely normalization of the status quo. While there is potential for virtually anyone to make money on the sub-optimization of downstream innovation worthy of some opportunistic investment, upstream innovation to which real venture capitalists can hang their hat on (to produce returns to Limited Partners) requires a fundamental rethink of the status quo that subsequently obliterates all previous sub-optimizations of downstream.
Or go home
So, in summary, the risk/return expectations of crowdfunding and prime venture capital are so different, that a conjoined deal is highly unlikely to produce venture style returns. Blissfully ignored, of course by the many desperate subprime venture capital investors chasing wannabe entrepreneurs.
Now you know why my slogan for entrepreneurs also applies to venture capital investors: “Life is too short to follow.”
