Why Angels Should Keep Their Distance from Crowdfunding in 2014

Opinion

There’s certainly been a lot of uncertainty in the angel and venture capital arenas over the past decade, and understandably so. Add to that, the lure of crowdfunding—a nearly $3 billion business in 2012—and it’s led some angel groups to consider if there is a role for individual investors in crowdfunding their deals.

My advice to my colleagues: There could be, but stay on the sidelines for at least another year.

Why? For starters, it’s unclear how crowdfunding will affect company valuations. The Jumpstart Our Business Startups (JOBS) Act, requires startups to publically disclose a laundry list of items if they choose to raise capital by crowdfunding. These include entity formation, background checks, shareholder listings, financial statements, share valuation and a business plan. That might seem all well and good on the surface, but angels and VCs look at many other important metrics to determine the true potential worth of a newly formed venture. These include total available market, intellectual property, management team, and other key performance indicators that, from our perspective, are at least equally important in determining the fundability of a company. The investment risk multiplies if crowdfunding portals do not address these important metrics, and this is one place where angels and angel groups can help reduce the risk.

Second, a crowdfunding platform disclosure might actually give away too much information—foiling the chances for a company to gain a “first mover” advantage in the market. Think about it for a second—what better way for an established rival to usurp a newcomer than to watch a Kickstarter campaign take off, grab enough details to mimic the product’s features, functions, and benefits—and get production rolling at a lower price point before the startup can get out of the gate. Even if the IP is protected, the litigation costs to defend it will drain whatever capital the company raised.

All of this is not to say that crowdfunding is a fad that will ultimately fade away.

There will undoubtedly be aspects of crowdfunding that will eventually make … Next Page »

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Jeff Draa is the current president of the San Diego chapter of the Tech Coast Angels, the largest angel investment organization in the United States. Follow @

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