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It turns out that people who are good at raising money through crowdfunding campaigns are also pretty good at raising money from venture capitalists.
Hardware projects that have raised at least $100,000 through Kickstarter or Indiegogo have gone on to raise $321 million from venture capitalists, according to a report published on Monday by research firm CB Insights. About 9 percent of the 443 projects that reach the $100,000 threshold on the crowdfunding platforms have raised venture capital, too.
When crowdfunding took off, some people believed the idea could pose a threat to venture capital as the prevailing way for technology startups to raise money. Predictably, professional investors quickly found a way to co-opt the trend. Venture capitalists are smart enough to browse the projects on Kickstarter and conclude that the really popular ideas might turn out to be good businesses. “We consider that an extremely helpful data point about whether the public wants a device,” says Peter Moran, a partner at venture firm DCM. The firm hasn’t made any investments in post-Kickstarter investments, but Moran says his colleagues are increasingly attuned to crowdfunding platforms.
Why didn’t crowdfunding, with its more favorable terms, become the alternative to venture capital? It’s really hard to build a gadget company, even if you’ve had success raising money to do so. Prominent Kickstarter projects like the Pebble smartwatch and Ouya gaming console have been overwhelmed by demand, and so both of these crowdfunding darlings turned to venture capital to help reach the scale needed to satisfy their Kickstarter supporters.
Kickstarter itself—launchpad for more than 80 percent of the most successful hardware campaigns—has no problem with veterans of its platform seeking other forms of funding. “Creators maintain total creative freedom to create on their own terms,” wrote Justin Kazmark, a company spokesman, in an e-mail. “For some that might mean staying independent. For others, it might mean taking their project to a bigger stage or working with others.”
There can be a little more ambivalence coming from people whose favorite Kickstarter companies get gobs of venture capital (or worse yet, sell out to a giant social network). Not everyone who backed Oculus VR, the virtual reality headset, was patting its founders on the back when Facebook (FB) paid $2 billion to buy the company. “I think I would have rather bought a few shares of Oculus rather than my now worthless $300 obsolete VR headset,” donor Carlos Schulte wrote on the original Kickstarter page after the acquisition was announced. The sale, of course, was a windfall for the venture capitalists who had invested $91 million in the company. (Bloomberg LP, the parent of Bloomberg Businessweek, is an investor in Andreessen Horowitz, one of Oculus’s investors.) But there was no additional upside for the crowd that backed the idea in the first place.
This could change if the federal government ever gets around to putting the long-awaited equity crowdfunding rules into place. It wouldn’t necessarily be a better deal for entrepreneurs raising funds—who can now raise millions while holding onto 100 percent of their companies—but it would potentially be better for would-be investors looking to risk their money on long-shot ideas.
In the meantime, crowdfunding platforms exist as either clever forms of market research or clever ways to separate suckers from their money, depending on your point of view.
Douglas Anderson is the CEO of Wall Street Capital Partners, a venture capital firm that assists clients in the rapid expansion of their business through investments, financings, mergers, acquisitions, and dynamic growth strategies. Read more discussions on business and investment here.
