So, “… venture capitalists have only been able to figure out how to generate good returns on half of it.” These are professional, full-time, experienced people and they failed 50% of the time to make money (which is not so bad, actually, as statistically, in a portfolio, it’s more 20 to 30% of investments making money and the rest, not). And now, Mr & Mrs Smith who barely understand what is the stock exchange, what is a mortgage (otherwise, there would not have been a sub-prime mortgage bubble), or a bank statement, will be able to make money out of start-ups? That’s quite strange. Maybe Mr & Mrs Smith should also do their own surgery, because after all, they do not need these surgeons, who (by the way) sometimes fail to cure their patients?

So excessive cash available is good for entrepreneurs? Since when? When does the principle of lean start-ups and cash-starved business pushing everyone to be the most efficient possible stopped to apply? Does it sound 1999 or 2000 again? Or is any entrepreneur fool enough to believe that it’s only about money?

I happen to have invested as a professional VC in a previously crowdfunded company. What a chaos! Nobody was really seating at the Board, doing the job of a professional investor: questioning, advising, challenging, bringing contacts and networks and basically adding value. The shareholder’s agreement was a mess and guess what? It was impossible to renegotiate as it was signed by xxx shareholders who could not give a damn about it to amend it! Good luck with that! (we had to go sign loads of side letters with the founders to basically recreate a small round with them only).

Finally, the problem of entrepreneurship financing is not that VCs are stupid, or entrepeneurs are greedy, or anything close to that… It’s that there is too much money for a given number of quality opportunities per year. Valuations are regularly too high, entrepreneurs regularly raise too much money and the result is depressed returns.

So crowdfunding is just the sign of yet another bubble which, by the way, will probably as soon as it burst keep the masses away from VC, start-ups and everything close to that for one or two generations.

It’s a great point that individuals “investing” $100 or less have a different risk tolerance than VC’s. But even more important is that individuals may have entirely different set of goals than VC’s with their investment. You point this out briefly and I’d like to take it further.

Not every organization or initiative is a VC-fundable enterprise, especially at inception. A crowdfunded organization may create different value beyond simply the prospective financial return required by VC’s.

As the Founder and CEO of a for-profit social enterprise focused on rural small-holder farmers (www.driptech.com), I know that there are investors who value social impact in addition to financial impact. This is often easier for individual investors, who don’t have an explicit profit-maximizing investment mandate like VC’s. Much of our early funding came from such individual “Angel” social investors. Now our investors include both Vinod Khosla and a publicly-listed corporation. Crowdfunding can take early-stage social impact investing one step further.

The most exciting thing about crowdfunding is the opportunity that it presents to individuals to invest directly according to their personal interests and motivations, which could be a combination of profit, social impact, or something else. This specific, personal involvement is one of the reasons that Kiva.org has attracted so many individual lenders in the microfinance space. Now anyone can be personally connected to the excitement of a startup, even if they only have a few hundred dollars to invest.

Peter

I spent some time on the website “petridish.org” (mentioned by Fred and another commenter here). Based on the info provided, I cant help but think that the success of various projects in raising funds largely depends on the “catchy-ness” of the title and picture. At this point, it is more like a “donation for a cause” (save the vampire bat!) rather than any form of investment/funding.

The participation of a VC in the process will help in vetting of ideas, tuning and pruning of business plans, executive leadership, contacts and networks, exist strategies etc .. the most important things in the ultimate success of a startup (rather than the original idea itself).

I spent some time on the website “petridish.org” the other day (the website was also mentioned by Fred and another commenter here). Based on the info provided, I cannot help but think that projects are getting funded based on the “catchy-ness” of the title and picture. Not-surprisingly, maximum number of donations fall in the $25-50 category. It is more of a “donation” of a cause concept rather than an investment/funding at the moment.

The participation of a VC in the process will definitely help in vetting of ideas, pruning and tuning of business plans, executive leadership, attraction of top talent, contacts, networks, exit strategy etc.. all of which are eventually the most important factors in the ultimate success of a startup (rather than the original attractive idea itself).