Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.

CARY –  According to Statisca, ventures in North America raised $17.2 billion last year through crowdfunding campaigns. That’s a 17.4% increase over the previous year. Even with only 22.4% of crowdfunding campaigns being successful (i.e. raising their minimum amount to close), they are still projected to raise over $300 billion by 2030 according to Business Wire.

That kind of exponential growth rate makes some wonder if crowdfunding will eventually replace the need for angel groups and early stage venture capitalists. Will innovation in the US be fueled virtually by micro investors rather than traditional venture funds?

While I’m a big fan of any movement or mechanism that gets more startup capital in the hands of entrepreneurs, I do believe that crowdfunding creates both new opportunities and challenges for entrepreneurs.

Where Crowdfunding Works Best

Crowdfunding seems to work best with consumer offerings. Successful crowdfunding campaigns are first of all successful marketing campaigns. They make consumers aware of a new product that they can help to bring into existence by investing, donating or lending their capital. This engages consumers at many levels. Early adopters and those who generally want to encourage the development of what the startup is offering get bragging rights, a free or discounted beta product, stock or other benefits for a relatively small investment amount.

A while back I encouraged a founder wanting to raise money for a local brewery to engage a group to assist him in launching a crowdfunding campaign. This was a great way for those in the community who wanted to see a local brewery in their town to help make it happen.   Not only did this entrepreneur raise the funds he needed, he also picked up a lot of loyal new customers in the process who now considered this “their brewery and pub.”

Where Crowdfunding May Not Be the Best Choice

Other entrepreneurs, however, were not served as well through crowdfunding. Entrepreneurs with complex B2B software offerings that cannot raise money from a sophisticated venture capital firm often turn to crowdfunding. The average successful crowdfunding campaign has over three hundred investors so the risk to each investor individually is much smaller than to a VC writing a check for the full round. So, crowdfunding investors don’t tend to spend as much time in due diligence, market research or reference checking as professional investors.   Their risk is low so they often invest more from the heart than the head.

I’ve witnessed some of the entrepreneurs that we turned down for funding go on to raise capital through crowdfunding. Unfortunately, so far, not one of these ventures survived. This gave crowdfunding a bad reputation in some circles. One seasoned venture capitalist told me once at a conference that, in his opinion, crowdfunding is “where the worse deals go to die”.

I think the best thing a venture capitalist can do for an entrepreneur is to tell him or her “No, I will not invest in your venture and here is why.”  Actually, at Cofounders Capital, we like the alternative way of saying this i.e. “Yes, we would invest if…”   Most startup plans are missing some things that are critically important for that venture to succeed. It is through the process of having a sophisticated investor tell you no and why, that can eventually lead to a fundable venture. This is not a service crowdfunding provides. Many times we have turned entrepreneurs away with a no and some homework but they kept pivoting, innovating and refining until eventually we did invest.


Crowdfunding is often the right investment process for ventures of the heart and those that want to build out a quick consumer base.   But consumers are not partners.   They most likely are not going to do the heavy lifting necessary to help the new venture or to keep funds in reserve to protect their investments when things take longer or cost more than anticipated.

I’m glad crowdfunding is available and growing so quickly but it is not a panacea. It is just another funding source that is right for some ventures and very wrong for others.