by Randell Young, General Partner, Cache Creek Partners
According to Crowdnetic, a total of $218 million was raised through equity Crowdfunding in 2014.
Sounds like a lot doesn’t it? It’s not.
In that same year, according to the National Venture Capital Association, US-based venture capital funds invested a total of $48.3 billion.
That’s more than $200 invested by a VC for every $1 invested through equity crowdfunding. What?!
But what about all those crowdfunding websites that claim to have raised billions of dollars?
First, you have to sort out the donations from the investments. Then, you need to read the fine print. Here is the disclaimer crowdfunding sites typically post at the bottom of some page where your eye will have to pick it out of many other lines of text…
“*Funds raised by entrepreneurs as reported individually to [our website].”
In other words, some guy trying to induce people to invest in his $10 million deal has typed in a value of “50” in the percentage-of-goal-reached box and the crowdfunding website has tallied that as $5 million raised.
When you get down to credible, independent, third-party reporting, those “billions” suddenly become $218 million… or less than one-half-of-one percent of the $48.3 billion invested by US-based venture capital funds.
So, how come then, all I hear about is crowdfunding?
It’s called journalism. It’s designed to sell newspapers and magazines, websites and TV shows. Whether or not the information is good, useful or even truthful is a secondary consideration – if a consideration at all
Here is how Thomas Jefferson put it.
“The man who reads nothing at all is better educated than the man who reads nothing but newspapers.”
“Advertisements contain the only truths to be relied on in a newspaper.”
Another way to look at is this. Dog bites man: not a story. Man bites dog: story. It’s the anomaly that gets the media coverage. In the context of early-stage investments, this means that crowdfunding is hyped as the next big thing while the mother lode of startup funding, institutional venture capital, is considered boring and passe.
And there is another, very practical, reason why crowdfunding garners so much media attention. Have you noticed how most of the articles written about crowdfunding reference the JOBS Act Title II? When you consider Rush Limbaugh’s theorem that nearly all of what passes for media these days is really just the propaganda wing of the Democrat Party, it makes sense that they would want to create as much buzz as possible around something they can then credit to their president, especially when both economic growth and wages are stagnant, home-ownership is at a 20-year low, 46 million people are on food stamps, 40 percent of the unemployed have given up looking for work and the labor force participation rate is the lowest it’s been since 1977.
“The general who wins the battle makes many calculations in his temple before the battle is fought.
The general who loses makes but few calculations beforehand.”
Sun Tzu
Remember how the notorious bank robber Willie Sutton is said to have replied when asked why he robbed banks? “Because that’s where the money is.” Urban legend or not, the point can still be well taken.
Medical schools teach the Willie Sutton Rule as, “When making a diagnosis, it is worthwhile to first focus on the obvious and conduct medical tests that may confirm the most likely diagnosis, rather than trying to diagnose an uncommon medical condition.”
Investopedia quotes the Willie Sutton Rule as, “a somewhat apocryphal axiom that stresses the need for an individual to focus on activities that generate high returns.”
In 2014, U.S.-based VC funds invested a total of $48.3 billion in start-ups. According to the 2014 Halo Report issued by Angel Resource Institute, Silicon Valley Bank and CB Insights, US angel investments totaled $1.65 billion while Crowdnetic reports a total of $218 million in equity crowdfunding in 2014. Thus, US-based venture capital funds contributed over 96 percent with angels (3.29 percent) and crowdfunding (0.43 percent) combined less than four percent of all dollars invested in start-ups in 2014.
There are now well over 200 crowdfunding websites chasing that $218 million; and several dozen chasing that $1.65 billion.
You can go with the herd and chase your piece of that $218 million or you can apply the Willie Sutton Rule to your startup – go where the money is – and put your opportunity in front of the professional investors that control the $48.3 billion.
Followers will make few calculations. They will simply tag along after the crowd.
Leaders will do the math.
