Earlier this week, we featured student entrepreneur, Brooks Gabel. Brooks is in the process of launching his startup justlikeyou.org, a non-profit organization providing a free and anonymous social network for people 13 years and older going through the coming out process. Brooks told us about his upcoming crowdfunding campaign using Indiegogo where he’ll be raising $50K. This begs the question, who should entrepreneurs go to for funding: the experts or the crowd.
One of the strategic missions of the Dingman Center is the bridge the gap between research and practice. By welcoming Dr. Rajshree Agarwal as academic director last year, the Center has been working more closely with faculty to support their research and better connect them to rest of our community. One way we do this is through the Dingman Research Seminar Series. Inter-disciplinary in nature and drawing from all departments from across the Smith School, the series highlights professors who received summer research grants from the Dingman Center.
Last semester we hosted a Research and Practice Seminar that facilitated interaction between faculty, Dingman Center Angel investors, and students from the undergraduate, graduate, and PhD levels. Professor Siva Viswanathan led the discussion presenting his research titled Who you gonna call: The experts or the crowd? In short, his presentation described the basic differences between funding from angel investors or venture capitalists and funding from the crowd. Here are some highlights from Professor Viswanathan’s research:
- There were 536 active crowdfunding markets worldwide with total revenue in the trillions. Despite these numbers, the crowd relies on experts to help make optimal decisions. Without expertise, how does the crowd know if they are making a good investment? How can they decide which entrepreneurs are trustworthy and worthwhile?
- Angels and VCs provide the valuable expertise needed to influence decision making.
- Crowdfunding platforms creating additional risk for investors while simultaneously providing an easier means of fundraising for startups.
- Crowdfunding markets can overcome these obstacles in a well designed market with access to the right set of information.
- The crowd is sophisticated enough to distinguish between experts and nonexperts, so intelligently designed crowdfunding markets can remain very active.
Knowing those basic factors, who do you call? The experts or the crowd? We hosted a panel discussion to find out.
Entrepreneurs-in-Residence, Ed Barrientos and Jason Shrensky, weighed in with their perspectives as angel investors and presented opposing views. Ed’s view was that the angel investing community is very different than it was 15 years ago. Before, you had to invest hundreds of thousands of dollars to be an angel investor. Now, younger people can invest $10K and call themselves an angel investor. With the emergence of crowdfunding technologies, this minimum is even lower. Jason argues that less people are participating than you think, so startups shouldn’t rely too heavily on crowdfunding. He also points out that when angels invest in a company they are involved in some way. They may hold regular meetings with the CEO or even intervene. This monitoring provides a necessary pressure for the startup that you don’t get with crowd funding.
But, why do people contribute via crowdfunding and why do startups like it? Ed argues that some platforms provide the structure that startups need to close deals. Even if there is interest from potential investors, a deal may never close because entrepreneurs are bad with logistics. Technology like Angelsoft helps. Board Member and Dingman Center Angel, Bill Boyle, adds that some people are interested in crowdfunding not for the return but because they want to support a business, cause, or entrepreneur they believe in. The group agreed that crowdfunding is good for social entrepreneurship, but it does not yet replace traditional funding methods for companies.
For now, the research and debate will continue. As we host additional research seminars we will keep our readers informed on hot topics such as this one.