What VC Gets Wrong About Crowdfunding

A tech startup founder was bragging to me about his recent hires a couple of days ago. He found some outstanding people and said that the talent available in 2021 was off the charts. 

But it wasn’t just luck or happenstance. The highly experienced people he interviewed all told the same basic story. It went something like this: “My company let me go as a cost-cutting measure. Our VC funding had completely dried up. They told us they were keeping their powder dry for as long as it took for things to clear up — meaning when the pandemic went away.” 

In the meantime, all the major crowdfunding portals also shared a story about 2020. Investing exploded. A record number of companies raised under Regulation Crowdfunding — with a record amount of money raised. 

These two stories are obviously very different from each other. But they’re not unrelated. A lot of the startups that were spurned by VC firms turned to crowdfunding. And retail investors did not turn their back on those companies. They were in front of their screens looking for things to do. Investing small sums into exciting companies with lots of growth potential fit the bill. Covid-19 definitely spurred crowdfunding. And founders took advantage. 

Gale Wilkinson is a Managing Partner at Vitalize Venture Group. And I give her credit for recognizing some of the advantages that crowdfunding brings to the table. She noted in a Twitter thread this week that “founders have additional capital sources” due to crowdfunding. 

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Image Source: Pixabay

That’s putting it mildly. Crowdfunding capital saved hundreds of startups from premature extinction last year. 

But Wilkinson also tweeted something that repeats and perpetuates a groundless myth. She said there’s also a big negative to crowdfunding — adverse selection. She claimed that she sees “companies listed on platforms that couldn’t raise from traditional VC.” In other words, she thinks that crowdfunding platforms are getting the rejects from Silicon Valley. 

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