In the wake of success stories such as Coolest Cooler, which raised more than $13 million on Kickstarter, I’m starting to hear talk that crowdfunding is making traditional financing less relevant. I question this logic—and not just because I’m part of the traditional financing world.
There are a number of reasons. First, not every product can be explained in a five-minute video (think: your next advanced iteration of carbon fiber). Nor can every product be built for prices the average Joe is willing to risk (for example, the next Tesla automobile), or be brought to market for
less than $10 million (e.g., the next generation of cholesterol drugs).
What’s more, I’m not willing to concede that venture capital is irrelevant for financing cool new consumer gizmos or, more important, that it can’t work in conjunction with crowdfunding. In fact, an increasing number of venture-backed startups are choosing to launch products on Kickstarter, in a symbiotic relationship that works for both the startup and the investors.
VCs are not blind to the advantages of crowdfunding. Successful campaigns provide validation—and connections. I backed a Kickstarter product, the OneBowl, a bowl-strainer combo that raised about $60,000. (A nice sum, to be sure, but anyone who knows about delivering plastic-injected widgets is aware that the mold and tooling alone will probably cost $60,000 to set up.) As I followed OneBowl’s post-campaign updates, it became apparent that the founder was getting inquiries about financing, manufacturing partners and even sales and distribution based on the success of the campaign. Those connections would ordinarily take years of pitching and road shows to put together. OneBowl did it in months.
Even if your company is well-funded, it is hard to find a more exciting and cost-effective way to launch a product than through a crowdfunding campaign. Where else is there a built-in audience of people so intent on finding the latest and greatest stuff that they are willing to help fund its development? This is why venture-backed firms like Misfit Wearables and cosmetics-maker Julep turn to crowdfunding to launch products.
VCs are sourcing deals via crowdfunding platforms at an ever-increasing rate. According to venture capital database CB Insights, nearly 10 percent of all crowdfunded projects that pass the $100,000 mark land some level of formal venture capital funding after the campaign ends. More than $300 million in venture capital had been committed to these companies as of mid-2014, according to the same report.
As these worlds collide, there may be some concern that VC-backed products are diluting the creative “specialness” of Kickstarter. But I believe that VC-funded players should be transparent about their backing, spinning their products to the crowd as less risky bets to fund. Conversely, VCs should stop pretending that crowdfunding is for amateurs and embrace its ability to lower the risk of finding the next big thing.
In the end, I hope we can all play nice. My new pasta dish depends on it.
This story appears in the December 2014 issue of Entrepreneur. Subscribe »
