CB Insights Validates Crowdfunding's Benefit to VC and Angel networks

When I first started talking about crowdfunding a few years ago, I thought it would be a great tool for entrepreneurs, but also a great way to de-risk investments going into seed rounds with traditional angel networks. I was quite surprised at the amount of backlash we received from these sources. Behind closed doors (and sometimes in open forums) we repeatedly heard that angels would never follow on to a company that started with crowdfunding.

It's been a long road, but today I received an email entitled "VCs love crowdfunding" by the highly respected analysts at CB Insights. Here are some of the highlights:

When crowdfunding first emerged as a popular model to raise money from groups of individuals, many pundits felt that crowdfunding would create a competitive threat to the venture capital model of financing startups.

It looks like the tides are finally turning, starting with rewards-based crowdfunding. In fact, according to CB Insights, total VC financing to-date to crowdfunded hardware projects has reached $321 million, of which 9.5% of crowdfunded hardware campaigns that have gone onto raise VC funding.

Naturally, they found that the largest round of 2013 went to virtual reality company Oculus VR, which raised a $75M Series B and sold to Facebook for more than $2BN earlier this year.

In 2014, investor deal activity to crowdfunded hardware companies is on pace to break 2013’s record with 19 deals already in the first seven months of the year. If the current run-rate continues through the end of the year, 2014 will see over 30 deals.

Although we continue to see resistance to equity crowdfunding from some angels and VCs, I attribute this to historical and reactionary defensiveness. Just like with reward crowdfunding, equity crowdfunding can open new markets for companies and a way to prove out concepts ahead of angel and VC funding. The advent of equity crowdfunding will open the process to companies that are not consumer-products companies and will allow crowd participants to share in the upside of the companies they back, unlike early crowd supporters of Oculus, who were left out in the massive profits seen by accredited investor and VC participants in the Facebook buyout.