Crowdfunding platform Indiegogo making a case for legitimacy

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Many VCs are wary of whether crowdfunding has a role in their industry, but the model received some legitimacy on Tuesday when Indiegogo announced it had raised $40 million in a Series B round that was led by Kleiner Perkins Caufield & Byers and Institutional Venture Partners.

IVP General Partner Jules Maltz, who helped to bring Twitter to the attention of the venture firm, said in a blog post that crowdfunding is at its “nascency right now” and is about to take off.

He might be onto something.

PeHUB affiliate publication VCJ has covered (see January 2014 issue story here) the rising number of well-known startups that have launched via crowdfunding, or are using the platforms to prove to investors that their startups are on the right track.

In addition, equity crowdfunding, up to now a less-known source for entrepreneurs, is certainly about to go mainstream. In October, the Securities and Exchange Commission issued its proposed rules on crowdfunding, pursuant to Title III of the JOBS Act. Comments on the rules are due Feb. 3, and it will likely take the SEC several months to comb through it all, so there is no timetable yet on when the regulatory agency will issue a final say on the topic. But chances are, it will essentially legalize crowdfunding.

If  that happens, crowdfunding could transform the way small businesses and startups raise capital. And venture investors will have to take notice of the platforms.

Some observers predict up to 100 portals will launch to accommodate the rush from investors as well as entrepreneurs, and they will account for up to $1 billion in equity transactions the first year.

Still, some VCs remain skeptical.

Randy Hawks, managing director of Claremont Creek Ventures, is less than enthusiastic about bringing equity funding to the masses through crowdfunding. He told VCJ that despite the potential of crowdfunding, entrepreneurs still need VCs for the long haul.

“One of the most important things we do is help the entrepreneur think through the financial strategy over a complete growth cycle,” he said in the upcoming February 2014 issue of VCJ. “You won’t have any of that help from crowdfunding.”

Meanwhile, Phil Reicherz, managing partner of seed-stage investment firm Magnolia Ventures, who launched New York-based crowdfunding portal CrowdHut two years ago, believes crowdfunding has its merits.

“Many venture guys don’t step in unless they see growth and traction after the entrepreneurs have raised an angel round,” he told VCJ. “They’re not going to get into a product that’s going to give them a 2x return.”

Photo of orange crowdfunding button from Shutterstock

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