Crowdfunding vs angels vs VCs

ESR has some good analysis of how crowdfunding will interact with the existing angel-investor/VC process.

Armed & Dangerous :: Eric S Raymond :: What does crowdfunding replace or displace?

I think he's on the right track, but I wonder how willing will people be to contribute to crowdfunded projects by established firms? It seems like people are more willing to contribute to the (imagined?) plucky tinkerer in his garage than to an existing small-medium firm who is just looking for lower cost of capital.

In my view Kickstarter is just busking, especially now that they've moved to discourage people from using it as a platform for prepayment. Are you really going to be willing to keep chipping in money to fund projects from existing companies with a track record of product releases?

Maybe there are simply too many Scots in my ancestry for me to get so loose with the purse strings, or maybe I've just been living on a grad student's budget for too long, but crowdfunding doesn't have much appeal to me either way. (Unless it's just a pre-order system.) I'm glad it exists, and I'm glad other people are getting utility from it, but it's not for me. Not until I can get some equity out of the deal.

PS Sort of related — The Economist: Babbage :: After the Crowd Leaves

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2 Responses to Crowdfunding vs angels vs VCs

  1. guest says:

    "In my view Kickstarter is just busking, especially now that they’ve moved to discourage people from using it as a platform for prepayment."

    I won't disagree with that; project crowdfunding ala Kickstarter is very different from equity crowdfunfing as envisioned by the JOBS act.

    The thing is, that the "all-or-nothing" model makes it feasible to fund public goods. So yes, it's "busking", but a quite successful kind. The argument that an all-or-nothing mechanism can fund a public good was made by Bagnoli and Lipman, (1989) "Provision of public goods: Fully implementing the core through private contributions". The mechanism does not fully solve the free-rider aspect of contributing to public goods, but it does so to a significant extent. Nevertheless, I also think that the pre-ordering aspect of KS is important as a commitment mechanism (it avoids holdout problems after the project is funded), so yes, it is a problem if they are moving away from that.

    • admin says:

      I don't mean to criticize all crowd-funding (or even Kickstarter, for that matter). It's definitely useful, as you point out. I do prefer the equity-based approach, and I do prefer to leave the door open for pre-orders.

      I'm concerned that the approach KS seems to be taking, focusing on a charity-like outlook, is the wrong one specifically because it makes them more like a busking-clearinghouse. And frankly, I don't even have a problem with busking. I rather like it, especially in contrast to directly asking for money. At least the busker is acknowledging that there's a two-way transaction: I do something for them, and they do something in return. Whatever they do might not be something I actually value as much as the money I give them, but at least there's a two-way exchange going on.

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