Crowdfunding Myth Busting Series – Capital Flood

Peter Adams, Executive Director at Rockies Venture Club

Let’s tackle crowdfunding myth busting to better prepare for raising capital. What are the most commonly believed myths in crowdfunding? Let’s look at many of them to find what’s truth and what to debunk. We’ll start with crowdfunding as a flood of capital. Then we’ll examine several more myths over the next week or two, so look for subsequent blog posts in the coming days.

Myth #1:

Crowdfunding will open the floodgates of capital for their business.

Reality:

It’s a lot more difficult to raise money than entrepreneurs believe. There is not a huge, untapped market of investors out there just waiting for the opportunity to invest in startup companies. Those who have the interest are probably already involved in Angel Investing groups like Rockies Venture Club. The rest are unaware of the opportunities for angel investing, and crowdfunding is not likely to produce immediate activity among these investors.

Entrepreneurs have difficulty raising capital for lots of reasons. Rarely is it because they simply can’t access unaccredited investors or public solicitation. There are many other reasons that keep entrepreneurs from getting their investment – primarily surrounding their concept (is it a lifestyle company or a venture company?) or their readiness level.

The most common problem is that entrepreneurs want to jump into fundraising before they do the work. Even on a crowdfunding site, backers are going to want to see an experienced and proven team, a product or prototype, paying customers, proformas, and other finished homework before funding occurs. You may not need these things when approaching friends and family for investment, but when you are convincing people you’ve never met before – you need to be prepared.

Companies will still need to spend huge amounts of time and money to bring people to their portal sites and invest.  This is not a “build it and they will come” situation. Even if the company has gone through a thorough readiness preparation, the marketing of a public security is complex and expensive. Just having a page or video on a portal is not likely to sell equity in your company or gain you donations. You will need to mobilize your social media network, reach out to individuals and groups, advertise, promote through speaking and making appearances at angel groups, and more.

Entrepreneurs who realize that funding portals are just one tool among many resources that they will need to marshal in order to receive investment will tend to do the best when crowdfunding sites are launched.

 

Stay tuned for the next crowdfunding myth busting blog post on fraud