Jeff  Carter

One of the latest trends in financing for start ups is crowd funding. Various websites are trying to tap into the social media craze by establishing a social funding network for a start up company. While I appreciate the sentiment, I am not sure that’s the best way for founder’s to raise capital for the long term viability of their company. As with most things, it depends.

What’s it depend on?

Well, if you have zero resources, no friends or family with any sort of expendable money for you to try and build a business out of, then I get using crowd funding to get capital for a “Friends and Family” round. You can only take a business so far without capital. Many businesses these days are based on a freemium model, so getting cash flow through the company initially is difficult.

However, if you are a startup and just want to take a check from an investor and run with it, you are making a mistake. Founders, it’s not just about the money. It’s also about mentorship. How many times have I seen companies with good ideas go broke because of issues besides money? Quite a bit.

More often than not, a founder has good command of the initial market they are trying to attack. But, more often than not, they don’t know a lot about running a company once they get a big capital infusion. It can be intimidating. Lack of confidence can doom the company because it infects the culture. You begin to second guess yourself. Without a good mentor, you can be doomed before you start.

Crowd funding works fantastically for certain things. There is a Chicago start up called Give Forward that takes the concept of crowd funding and applies it to people that are sick and need money for operations. It’s a great idea. The company is doing well from what I understand.

But, to carry crowd funding to all start ups is a different matter.

Currently, the bill is stuck in the Senate. It will stay stuck there for a little bit while they iron out the kinks.

There are various problems. One is that you might get mercenaries that will prey on unwitting people. No one wants that. Yesterday’s snake oil salesman might be today’s traveling venture capitalist. Certainly, no one in the industry wants that, since they have worked hard to get decent reputations. The last thing they need is Snidely Whiplash ripping off Grandma.

Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.