Book Review : The Crowdfunding Revolution [Social Networking meets Venture Financing]
As a follow up to my earlier post on crowdfunding [a concept wherein the ‘crowd’ – that is, people like you and me – can participate in the early stage funding process] , I got an opportunity to read this book by Kevin Lawton and Dan Marom – in which the authors reason out as to why crowdfunding is a natural progression to the current status of venture financing – given the increasing impact of social networks in our lives that has simplified sharing of views and knowledge – thus deploying the ‘wisdom of the crowds’ to the otherwise ‘private’ world of venture capital.
Citing numerous examples [right from how funds were raised for building the Statue of Liberty (!) to Open Source Development, Wikipedia, etc] , the authors emphasize on how the advent of information technology has raised the possibilities of collaborative projects. That’s one reason why it is only now that this concept makes more implementation sense – than say, a decade ago when collaboration was not that easy.
The book also takes plenty of digs at the ‘traditional’ venture capital model. It questions the very basic understanding that early stage investments should only be in ‘informed’ hands – saying that IPOs have not just been an important form of VC liquidity, but also a ‘dumping ground for low value startups’ – citing the dismal 1-in-20 post IPO odds of shareholder value creation. It suggests that the ‘traditional’ VC business model is outdated – and it is highly unlikely for a few people in the VC industry to keep pace with the ever increasing rate of change in technologies and businesses. It also suggests that VC funded startups might try too hard to achieve pre set ‘milestones’ – for the fear of further equity dilution – as against constantly tweaking direction (‘pivoting’) to match with that of the changing world.
The book also illustrates how crowdfunding of projects is ‘not just about money’, but – as it gives an example of crowdfunded movies – could also be in the form of other ‘perks’ like mention in the credits, discounts, appearances in the movies etc.
However, coming back to the ‘money’ part of it, the book underscores the irony with regards to startup valuations – wherein one is skeptical in letting the ‘market’ (implying the ‘crowd’) to decide the valuations and rather one lets ‘few parties with special interests’ decide the prices.
The book then turns the reader’s attention towards how a futuristic crowdfunding platform would look like. This, I thought was the most fascinating part – since the authors have not stopped at just pointing the deficiencies in the current system but have also offered a very well thought out solution – which touches upon almost all possible concerns. Some ideas like having a standardized XML like language for reporting startup information for algorithmic scanning are quite cool. This part of the book makes for some really interesting reading – as one encounters one futuristic concept after other (and also a sound reasoning as to why it makes sense).
Kevin Lawton himself has initiated an effort towards creating global best practices for crowdfunding platforms by way of this informal LinkedIn group (now that’s ‘crowdsourcing’ at work!). These best practices include focus on disclosures, informing investors about the importance of diversification, letting them know of the typical risk return profiles in early stage investments, etc.
All in all, this book is a comprehensive introduction to the concept of crowdfunding . The examples (which span across the past, present and the future!) spice it up well. A must read for anyone interested in the early stage funding process.
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