What Pain Point Is Crowdfunding Solving?

Posted by Jeff Carter
on October 9th, 2012

Entrepreneurs solve problems. Solve a big enough problem and you can build a big business. If we look at crowd funding from different perspectives, we might be able to gauge how successful it will be or what market segments it will service.

I don’t think there is any one expert on crowd funding. Personally, I am not against it, or for it. Like just about everything else, we haven’t seen the whole book on how crowd funding will work, might work, and the market will innovate. It pays to give it a lot of attention because if you find a key to turn it into an innovative force, it can help drive a lot of growth in the economy.

Kickstarter is an obvious choice to look at. Some enterprises have been wildly successful raising money on Kickstarter. But, there is no compunction to pay back your investors. People that put money into a Kickstarter project do it only for kicks. But, they solve a problem because it allows people to support projects with their altruism. Maybe they want to support the arts in a more tangible way than writing a check to a museum.

Other platforms use crowd funding too. GiveForward is crowd funding for a cause. Someone can’t afford a medical procedure and people donate to them so they can have it done. Clearly solving a problem for people. It also lets people put money to directly solve a tangible problem instead of writing a check to some foundation or blanket cause.

When it comes to entrepreneurs raising money for great ideas, and giving up equity, will crowd funding be solving any problems?

From the person on one side of the table, will it help with deal flow? If you are accredited and on Angel List, you can see a lot of deals and get information on them. But, statistics show that if you are going to invest in start ups, you will be more successful investing in things that you know, and things close to home that you can actually leverage your expertise and network for. So, while looking at the deal flow is interesting, I don’t think it solves a problem-unless the investor can persuade the company to relocate to the area they live in.

What about the entrepreneur? Crowd funding can provide access to capital. But how many entrepreneurs don’t have access to capital? There are angel groups in every part of the country. Some more active than others. There are groups of private investors everywhere in the country. They are harder to get at, but I don’t foresee them getting on a crowd funding platform. An entrepreneur is still going to have to break into their network to get to them.

Secondly, is crowd funded capital the kind of capital the entrepreneur wants? I believe the first capital in the business is the most important capital. That’s where the corporate culture begins to germinate. That’s where the investor can make the most difference because the company is building. I have seen how individual investors at the seed level can have huge impacts, both positive and negative.

If we look at the life cycle of financing, it becomes clearer. The traditional friends and family round might be easier to accomplish with a random crowd funding platform. But, for the start up, it might be better to just find some customers willing to purchase product from them and build to suit. That’s how Apple started ($AAPL).

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