Crowdsourcing Versus Venture Capitalist: Determining Goals

History is filled with examples of passionate people doing whatever it takes to turn their ideas into reality. That’s the concept behind crowdsourcing and crowdfunding, and they’re not going away. Essentially, aspiring entrepreneurs can post their projects on sites like Indiegogo and Kickstarter and ask a large number of people to each contribute a small amount of money to reach a certain goal (hence, “crowdfunding”).

Even if the hype around sites like these dies down, there will always be enthusiasts – and their family and friends – who are willing to raise money for the ideas they believe in. This staying power raises a question: What does this mean for traditional venture capitalists?

Different Stakes, Different Games

The difference between crowdsourcing and traditional investing is a lot like playing poker. Many people play in a weekly game with friends where the stakes are low, and it’s more for enjoyment than anything else. But a few play in the World Series of Poker, which has a sizable entry fee and is usually dominated by professionals. The stakes are higher and it requires a different type of commitment.

Similarly, traditional investing requires a completely different set of skills and risk tolerance than crowdsourcing. Those who throw all their chips into one pot and have good reason to believe they’ll be successful tend to go after venture capitalistss with deeper pockets. People whose ventures are side projects that are just getting established prefer to seek investors who will let them fumble until they have two firm feet to stand on.

Ideas of Scale

Though it does have staying power, crowdsourcing will have little effect on venture capitalists and other traditional investors. With a few exceptions, the truly big ideas will most likely not be funded on sites like Kickstarter and Indiegogo. The entrepreneurs behind the next Facebook or Instagram will seek traditional investors who have more resources and the ability to scale – and who have the networks and experience necessary to help the entrepreneurs make it big. This is one area of entrepreneurship where self-awareness is more important than ever in selecting the right investor.

Different Markets

In general, venture capitalists seek out the next Dropbox or Twitter, and they’re not looking for them on crowdfunding sites. Some ideas are just better suited to crowdsourcing, while others thrive in traditional investing environments. Venture capitalists want the entrepreneurs who would rather be backed by a few key people with vested interest in their company, rather than hundreds of thousands of people who have put in a few dollars. Companies self-select either to raise money on crowdfunding sites or via the traditional round of angel or venture capitalists; it’s usually one or the other, not both. They’re simply different markets.

Although crowdsourcing isn’t going away, it bears few implications on the fate of venture capitalists or the traditional investing industry. It’s not a fad, and it’s not passing; it’s just a different market than venture capitalists are pursuing. Traditional investors want to put their money into the projects of entrepreneurs who prefer a few vested backers and a large scale. On the other hand, crowdsourcing sites cater to those whose ideas will succeed with the support of many people on a smaller scale. Both have staying power in their respective markets – and neither has much reason to worry.

Image credit: Peasap

About Bhavin Parikh

Bhavin Parikh is the CEO and co-founder of Magoosh, an online test prep company that provides video lessons and practice questions accessible anytime, anywhere for exams such as the GMAT, GRE and SAT.

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