Even before equity crowdfunding was signed into law earlier this month, an article in The Wall Street Journal voiced a critical opinion of equity crowdfunding. The idea behind equity crowdfunding is to ease the process of capitalizing small and start-up businesses; in turn, it is hoped this will create new jobs (hence the creation of equity crowdfunding in the JOBS Act).
Angel investors and at least one of their national trade groups have criticized the concept of equity crowdfunding, saying that it will make later stage financing more expensive and that unsophisticated investors are not likely to get the
[business] valuation right. Other angels criticize that a crowdfunded business will lose the benefit of the experience and guidance of a seasoned angel investor who brings important business contacts along with money when they invest.What all this criticism misses is the fact that angel investors and the venture capital firms that follow them into start-ups are primarily interested in high growth businesses that will in relatively short order stage initial public offerings and go public. An angel investor is never going to make an investment into a local bar or restaurant; he or she is only going to make an investment into a restaurant that seeks to become a regional or national chain. An angel investor is not going to provide valuable business contacts and guidance to open a day spa, hair salon, or other personal services business; he or she wants to invest time and money into a biotech, fledgling pharmaceutical, and similar businesses with the potential to become goliaths.
My advice, therefore, is to avoid equity crowdfunding if your plans include reaching out to the established equity financing channels of angel and venture investors, but do not allow those who would not invest in you to dissuade you from reaching out to those who are willing to invest in you.