When equity-based Crowdfund investing first came on the scene earlier this year, there was talk of how it might possibly “crowd out” venture capitalists. While historically venture capital firms and angel investors have been the dominant force in early stage financing for startups, Crowdfund investing, legalized by this year’s JOBS Act, is yet another funding mechanism that will bring a whole new class of investors into the capital markets. Under the law, entrepreneurs will now be able to raise capital via Crowdfund investing (CFI) up to $1 million annually, and unaccredited investors may invest up to $2,000 of their own money in these new ventures.
The early skepticism of and apprehension about Crowdfunding seems to be subsiding in VC circles, but that does not mean traditional firms have nothing to worry about. In recent years, VC firms have been criticized for lackluster performance, with only half of funded startups yielding a return, and although $30 billion has gone into venture-backed companies in the U.S. this year, venture capital investments have not outperformed the equity markets in more than a decade. Since 1997, less cash has been returned to investors than has been invested in venture capital. These figures suggest to industry insiders that the current model is broken, despite high-profile tech successes like Facebook, LinkedIn, Zynga, and a few others.
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