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Why Venture Capitalists Are Turning to Crowdfunding These platforms let potential investors screen startups and do their due-diligence check in a convenient, standardized fashion.

By Judd Hollas

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

The crowdfunding industry has been making great strides in helping entrepreneurs from all industry sectors solve the ever-present problem of undercapitalization. And forward-thinking venture capitalists have begun to take notice.

Given the fact that more startups and small businesses are launching crowdfunding campaigns, it's no wonder that many venture capital firms are turning to crowdfunding platforms to access new deal flow, according to VCs I've spoken with. New proposals are the life blood of venture capitalists or funding firms.

Traditionally, deal flow for venture capitalists came from referral networks or various website submissions. Crowdfunding platforms give venture capitalists additional deal flow volume and provide them with efficient mechanisms to review it, quickly communicate with entrepreneurs and make the investment decision-making process streamlined.

Venture capitalists use crowdfunding to easily determine if a deal is worth spending time on. Given the time constraints on their schedules, many venture capitalists agree that using a tool like crowdfunding is valuable and keeps them from wasting time chasing bad deals.

Related: How Venture Capital and Crowdfunding Can Be Mutually Beneficial

Venture capitalists receive dozens of business plans every day, often in various formats and some are lacking in essential data. Crowdfunding platforms inherently leverage technology to categorize multiple aspects of the companies seeking capital and present them in a standardized format that can be quickly reviewed by any potential investor.

This allows for a much quicker due-diligence process than traditional means. The crowdfunding platforms' standardized format that requires several data points from entrepreneurs provides venture capitalists and other investors with vital information that enables them to make an investment decision.

Crowdfunding platforms help entrepreneurs understand how to prepare and present their proposals in a manner that venture capitalists, angel investors and others prefer. The standardization of these proposals and business plans save venture capitalists' time as they don't have to search for specific information that could be in various locations in nonstandardized proposals.

And crowdfunding platforms have exponentially increased productivity, not only for the due diligence process. They serve to help increase the velocity of information and communications shared, negotiations and funding. Crowdfunding sites like AngelList, Fundable, Crowdfunder and my company's site, EquityNet, all leverage technology in an attempt to streamline the funding process.

"Crowdfunding is also compelling to VCs because it requires entrepreneurs to demonstrate the strength of their team and the value of their concept in the marketplace itself," says Ron Miller, CEO of StartEngine.

"This means that strong teams and strong concepts can be brought to market and receive exposure to a number of venture capital firms and other investors seeking to invest in their business," Miller adds.

Related: The Top 100 Venture Capital Firms

In addition, another appealing characteristic of crowdfunding platforms is the fact that there are tens of thousands of investors using them. These investors are the crowd and many platforms have devised ways for them to communicate with one another and provide fellow investors assistance in performing due diligence.

Through the effect known as the wisdom of the crowd, a large group's aggregated answers to certain questions are often better than those arrived at separately by individual members.

Crowdfunding platforms can also be used for effective product and service validation. Since donation and reward sites like Kickstarter are large mass-market platforms that allow anyone older than 18 to participate, a mass of potential early-adopter consumers vet companies' products and services before venture capitalists and other investors decide to perform their own due diligence.

The story of Oculus Rift lends credence to that. Oculus Rift was able to raise $2.4 million through crowdfunding, which led to another fundraising round led by venture capital firm, Andreeseen Horowitz, raised $75 million.

Of course, the capital structure for investment-based crowdfunding deals will need to continue to evolve to meet the standards of the venture capital community. Slowly, venture capitalists are recognizing that investment-based crowdfunding is an efficient means to find pre-vetted deals that are ripe for further capital investment.

In short, investment-based crowdfunding will remain an effective and valuable partner to the venture capital community.

Related: Use Kickstarter to Validate Your Million-Dollar Idea

Judd Hollas

Founder, CEO and Chief Inventor for EquityNet

Judd Hollas is the founder, CEO and chief inventor at Fayetteville, Ark.-based EquityNet, which provides a platform that raises capital for emerging and small businesses. Prior to this, he  served as division manager for Beta-Rubicon, a consulting firm specializing in technology assessment and business due-diligence services. 

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