Rise and Fall of an Industry - How good ideas fail?

We have all heard of the magic mantra, “Failure is the stepping stone to success”. Such is the story of the Crowdfunding industry and NIN Ventures (or NIN.VC). 

Crowdfunding is a practice of funding a project or venture by raising contributions from a large number of people, typically via the Internet. The 2008 Financial meltdown led to a liquidity crises for entrepreneurs, companies, LPs and VCs. Fewer IPOs in the market means no exit for VCs, no returns for LPs, and as a result venture funds were on a decline. No new funds means less startup funding, higher unemployment, and slower economic growth. Thus, on April 5, 2012, the Jumpstart Our Business Startup Act (the JOBS Act) was introduced, enabling crowdfunding for “accredited” Americans. 

There are various types of Crowdfunding options; like donation, reward, lending, equity, royalty, and even hybrid versions. However, the two most popular types of Crowdfunding methods are Reward and Equity. For Reward based Crowdfunding, entrepreneurs pre-sell a product or service to launch a business, and some times even in return for gifts or thank you notes. For Equity Crowdfunding, the backer receives share of a company, usually in exchange of the money pledged. For NIN Ventures, it would be a limited partner interest in the NIN Ventures Technology (QP) Fund. This offering was made available online (www.nin.vc) via general solicitation and general advertising, which is permitted by Rule 506(c) as contemplated by Title II of the JOBS Act. 

Since its beginning, Venture Capital has been the domain of wealthy individuals and families. A typical LP base in a venture fund would be institutions, pension funds, endowments, family offices, etc. We are all indirectly invested in Venture Funds, but Crowdfunding is an attempt to bring Venture Capital directly to the retail investor by eliminating the middleman. If all other businesses that follow this route have succeeded, why and where did Crowdfunding fail? 

Since 2014, the Crowdfunding industry had grown from $16 billion to $34 billion (with roughly $8 billion in Reward and Equity) in 2015; and was doubling or more every year, and according to the World Bank estimates, Crowdfunding was predicted to have a global market of $96 billion by 2025 – 1.8 times the global Venture Capital industry. However, recent studies showed that while the Crowdfunding industry has managed to grow, the Venture industry has outgrown the Crowdfunding industry. As of 2022, the Crowdfunding industry was estimated to be $125 billion (with $19.79 billion in Reward and Equity) vs. $234 billion for the Venture industry. 

Here are a few reasons why I think Crowdfunding and / or NIN Ventures failed: 

01. Awareness 

Any new industry needs to be promoted and positive marketing generally adds fuel to that fire in order to gather public interest. The Government was quick to make changes in order to save the Economy but did not follow through when it came to properly marketing the concept. The Crowdfunding Companies fell short when they tried self-promotion. We are all aware of Environment or Unemployment issues but how many people have actually heard about the JOBS Act? 

 

02. Education 

Venture Capital provides financing to early stage emerging companies with high growth potential in exchange for equity / an ownership stake. The risks VCs take investing in disruptive technologies or business models yield higher returns to their limited partners (or investors). Since the beginning of the 20th century, venture capital has been the domain of wealthy individuals, families, and institutional investors. While many of us are indirectly invested in venture funds via our pension funds, etc., most people have knowledge or a portfolio that is limited to stocks, bonds, mutual funds, money market instruments among others. While there are multiple resources available on how to make a good judgment when making a venture capital investment, it is likely that 99% of the times the individual might be proven wrong. Blind pools of money or venture funds are not encouraged by the SEC as they are prone to fraud, when it comes to Crowdfunding. Many are also not aware of redemption and other liquidity issues including lack of interest in the secondary market. 

 

03. Media Interest 

This lack of knowledge is further fueled by limited interest in the Media for Crowdfunding portals and companies. Speaking from personal experience, general solicitation and general marketing for Venture Funds had never been attempted before NIN.VC, so the questions and awareness that a journalist had were limited to his / her past experience rather than focusing on Crowdfunding as a business or industry. 

 

04. Governance 

Entrepreneurs are brave and courageous bunch that are determined to change the way an existing industry functions. On that journey, they need a lot more than just financing. They need guidance or domain expertise, help with PR/marketing, recruiting, viable exit strategy, more often follow up financing, etc., which Crowdfunding portals are not able to support given they don’t get a say or board seat for their investments. 

 

05. Trust 

Given the majority of Crowdfunding companies or start ups don’t make it, most people are now focused on failures and a few highlighted fraud cases glorified by the media, which raises trust issues in an already heighted risky environment. 

The SEC has now approved Title III JOBS Act, Equity Crowdfunding for non-accredited investors, which allows any U.S. citizen, regardless of income, to make direct investments via a Crowdfunding portal. However, investment in venture funds is still limited to accredited investors. Given funds are a less riskier asset class compared to Crowdfunding in companies, perhaps it’s time to revisit their investor eligibility, alter the definition of an accredited investor, and make Crowdfunding available for everyone. Until then, are American people given the wrong kind of freedom when it comes to their investment decisions? What is your freedom of choice worth here?  

PS: Given the current circumstances, we would like to inform everyone that we have closed doors on our beloved NIN Ventures (or NIN.VC). However, we will be sure to follow up this article with the lessons learned during our journey and what is next in store for us? Thank you for your time and continued interest! 

Source: 

Masssolution 2015CF 

Vantage Market Research and Precedence Research 

Crunchbase