The detrimental impact of crowdfunding shareholders

Can crowdfunding be suitable for all startups? According to the Asian investment house, Mason Baxter, no, it can’t as they believe that many businesses would be better served by more traditional methods of obtaining finance.

In fact, even though crowdfunding can be seen as

the evolutionary response to tight credit markets following the great recession of 2008/09

and for both entrepreneurs and unsophisticated investors it still represents a kind of quick win-win as, on one hand

entrepreneurs can pitch large groups of individuals for funds by posting a description of their prospective or existing business venture on an online platform,

and on the other

individual investors can then choose to make contributions to the venture by pledging money towards it,

still  there are several drawbacks that companies should be aware of when considering crowdfunding such as the detrimental impact the presence of crowdfunding shareholders on future financing:

It’s worth remembering that issuing equity through crowdfunding involves giving tiny stakes in your business to mostly highly inexperienced investors that many venture capitalists won’t be keen to invest alongside if your company should grow quickly.

If on one side this is worth more than a reasoning on the sustainability of crowdunding as a business strategy, on the other side the assumption behind that statement can be easily challenged as, at the end of the day, it always depends on the type of business and on the trade-off which could be spotted in a specific deal. Let’s consider, for instance, the recent case of BrewDog where, instead, talking on how to address the corporate governance issue would draw the attention on one of the toughest dilemmas for the industry itself:

how can crowdfunded businesses develop?

The answer is not about money but about mentoring, business networks, and corporate governance. But that’s another story.