In the previous post, we explained how VC funds and crowdfunding platforms can partner up. In this post, we will analyze how this collaboration can be established and what the unique advantages  for VC funds are.

Starting from the description of the investment process of VC funds, it is important to stress that these organizations need a very broad audience of investment opportunities and that one of the ways  to increase their scope of influence is to manage an extensive network of contacts. Although effective, this approach far from efficient. The online market can offer them an even more powerful source of investment cases. Online crowdfunding platforms can substitute the VC network of personal contact, by having agents specialized in brokerage of startups. In addition, platforms can apply the same selection criteria of the VC, thus helping the funds to skip some of the steps in the screening procedure. In the case of equity-based crowdfunding websites – besides hard criteria that are displayed online – the entrepreneurs behavior and crowd response can play an important role in VC decisions. According to Fried and Hisrich (1994), VC firms assess management’s abilities by checking references provided, as well as others not identified by the entrepreneur. The crowd is indeed a power reference and in case of crowdfunding is largely depending on the entrepreneurs’ ability of convincing them by showing their understanding of the business. As pointed out by Fried and Hisrich (1994), showing indicators of managerial skills is crucial in the first evaluation phase.

As a consequence, the main implication of the aforementioned paper is that a closer integration between crowdfunding websites and VC firms is beneficial to both parties, when set according to agreed selection parameters. The most interesting part in the deal is the shift of the hard and soft criteria screening from the VC to the online platform. Crowdfunding platforms are required to set instruments to highlight these features (e.g. management team strength, appeal to customers etc). However as pointed out before ,for Bas, this may constitute a hurdle because of online interaction between portal and startups.

Nonetheless, the crowd sentiment is a powerful indicator of valuable ideas and is inherent in the concept of crowdfunding and, along with the potential of Internet, determines a strong incentive to integration.

This hypothesis can also be inferred from other researches, such as that by Engel and Keilback (2007). They also conclude that the screening process of VC firms is very selective and ends by excluding most of the applicants from the process. They also state that the increase in VC deals during their investigation period (1995-2000) was due to government intervention with co-investment. This once again remarks the difficulty of VC funds to enrich their base of investment opportunities making use of innovative supply channels. Partnership with crowdfunding platforms will, on the one hand, increase their visibility as fund and, on the other hand, attract a soaring inflow of startups from different development stages.

The role of information providers of online platforms is also indirectly remarked by Berger and Udell (1998), who claim a crucial role of financial intermediaries in private equity market. Extending their reasoning, such role is not necessarily covered by financial intermediaries as usually intended (i.e. banks, private equity funds etc) but rather by specified market agents such as online portals. At the time the paper was published, there were no incentives for firms to enter the niche of information providers, but with the development of the technology economic incentives have arisen, especially in terms of initial screening. Given its core business, crowdfunding may be the go-to broker for startups. Although there are still few incentives for VC to directly invest online, the partnership will benefit also the crowdfunding website since it will attract higher quality propositions willing to have exposure to such VC funds and at the same time prove their concept on a sample of market (i.e. the crowd of users).

REFERENCE

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