Crowdfunding Isn't Killing Seed Funding -- It's Helping It

By Erin Griffith , written on September 21, 2012

From The News Desk

The rise of crowdfunding has created a misconception that Kickstarter is disintermediating venture capital. Suddenly VCs are useless and irrelevant in their roles as the gatekeepers of good ideas.

Now founders don't have to desperately pitch themselves to the sweater vests -- they can go straight to the people. The Pebble watch guys didn't need VCs to believe in their idea. In fact, they were rejected by investors before raising millions of dollars from thousands on supporters online.

The Web has leveled the playing field on so many things; it's about time that it democratized the flow of capital to tech startups. Who needs seed investors? The good deals will now go straight to the Web. Or so the thinking went.

But if you ask any seed stage venture capitalist about this line of thinking, you'll hear a very different perspective. The topic came up this week at the Dow Jones Private Equity Analyst Conference. Security concerns aside, the consensus was, crowdfunding is a good thing for the industry.

Let's discard all the scaremongering about the handful of bad actors that could trick innocent old ladies out of their money. And the issues of vaporware companies raising money without viable product in sight. (Kickstarter is already cracking down on this with stricter guidelines.)

Crowdfunding merely makes an investor's job easier, Jon Sakoda of New Enterprise Partners said. When he evaluates seed investments, he's looking for product-based milestones or successfully run experiments, and that is essentially what a successful crowdfunding campaign is. "It lowers the cost of running those experiments," he said, because the companies don't have to burn investor capital to do it.

His fellow panelists agreed, pointing out that crowdfunding brings more capital from new sources to startup ideas, which boosts the entire ecosystem. It certainly has caused VCs to reconsider their biases against hardware startups, which are becoming cheaper to build. Besides, successfully crowdfunded companies often need the guidance and expertise of a VC to navigate their journey to becoming large, successful companies. Seed investors will not be disrupted.

It's possible that their comments were overshadowed by the reluctance of anyone to ever say anything controversial on stage at a stuffy finance conference. Or maybe it's just self-preservation. But I've heard the same sentiment in plenty of casual conversations with both VCs and angels. Crowdfunding might influence VCs, but it won't replace them.

[Image courtesy Tax Credits]