There are a countless number of ways for startups to try and raise capital for their new ventures, but not all of them are the right fit for each startup. Most entrepreneurs have the initial reaction that they need to go out and find capital as quickly as possible. Inexperienced entrepreneurs do not realize the repercussions that can happen by selecting the wrong funding outlet. Crowd funding is becoming increasingly popular because of the ability to microfinance investments. This industry shift makes deal flow happen more quickly but limits the amount of relationship resources needed to help build successful businesses. If you are not an experienced entrepreneur, this method of investment can pose a huge financial and educational risk.
Experienced entrepreneurs can raise money quickly and will not have to worry as much about building the relationships with their investors. These entrepreneurs have already received mentoring and have built successful businesses in the past. However, most of the entrepreneurs that entertain raising funds through crowd sourcing outlets do not have a lot of experience raising capital. The entrepreneurs that are well vetted will most likely already have a network of investors built and will not need access to crowd funding sites. There are some exceptions to the rules, but most of your experienced entrepreneurs starting new ventures have a personalized venture capital and angel investor network. As a result, crowd funding sites end up with entrepreneurs with less experience. Investors finding deals in these crowd funding outlets run the risk increasing the risk in their portfolio.
At first glance crowd funding seems like a great option because it lets people invest in small increments, but most people do not realize that this also increases risk levels for entrepreneurs. Having good mentors rapidly accelerates the success of a business. Many entrepreneurs become successful by learning from their investors and advisor council. Crowd funding sites take away from the process of building the entrepreneur and investor relationship. These relationships are the key to building a successful enterprise and increasing economic growth. Money is great, but sometimes how you receive it is more important for the livelihood of your business. Getting the financial resources for your business is extremely important for its long term success, but the having the relationships with other intelligent people can help the entrepreneur more clearly understand what to do with the investment. Venture capital and angel investments are often not properly allocated even with guidance. Crowd funding makes this problem even worse.