Before you jump on the crowdfunding gravy train, stop for a moment and think about what the term really means.
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Equity crowdfunding is when a group of individuals get together and contribute money in return for a share in a business.
Hang on a minute – haven’t you heard that concept before?
Wealthy investors have offered money to entrepreneurs in return for a share in the profits for hundreds of years.
Crowdfunding is nothing new – the advance was technology that allowed entrepreneurs with private, unlisted businesses to pitch directly to investors for cash.
Crowdfunding no longer applies
Some crowdfunding experts argue the name is misleading. Equity crowdfunding has reached a fork in the road.
One route offers a crowd of investors the opportunity to stake cash on a project or idea.
The other allows entrepreneurs to select the investor or small group of investors that have the cash, contacts and other resources to take their businesses forward through early growth to profitability.
Some institutional investors are also dipping a toe in the crowdfunding pond.
Equity crowdfunding is dead, says Ryan Caldbeck, founder and CEO of investment platform CircleUp.
“The term no longer applies,” he said. “Crowdfunding puts the focus on the wrong side of an investment because the phrase doesn’t properly explain what’s going on.
“Individual investors are important, but the crowd is not what every company needs. Some entrepreneurs need the crowd, but just as many want to select a few, key backers from the platform marketplace.”
A change in the market
Marketplace investment is more about introducing technology to take away barriers, increase efficiency and reduce costs, says Caldbeck.
“What we have seen happening is institutional investors joining the crowdfunding marketplace,” he said.
“This isn’t crowdfunding because there isn’t a crowd. The market has become somewhere for entrepreneurs and institutional investors to come together. What we have is marketplace investing where individuals and institutions can work side by side.”
Caldbeck does not see the demise of crowdfunding as a problem because marketplace funding will rise to take its place.
“The potential new market will bring transparency to investing and streamline the process of raising money which will only benefit investors and entrepreneurs. So let’s stop calling this process crowdfunding and call it marketplace funding instead,” he said.
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