“As I walk through the valley of the shadow of death, I take a look at my life and realize there’s nothin’ left” – Coolio (and pretty much every entrepreneur seeking startup funding after burning through their savings!)
Tread carefully in the valley
The Valley of Death typically refers to the $30,000 – $250,000 gap between a founder’s own money and the time before any capital might be provided by VC funding. This is a precarious position and the reason many founders flounder; in the early days they’re forced to keep spending cash with no end in sight. Often, this runway ends before VC funding can be secured and the founder’s business never makes it to market. This is especially true for minorities and underrepresented groups. These groups are disproportionately missing from the VC ecosystem, which means they struggle to build quickly, earn revenue and send the elevator back down.
The view from the top is smudged
VC’s generally require startups to fit themselves into rigid, predetermined boxes, spend anxious time in pitch meetings, and ultimately try to play God by deciding who they deem worthy of potentially life-changing funding. Considering that the money raised through equity crowdfunding boasts a 60% successful raise rate, and venture capital’s success rate hovers around a dismal 6.5%, the path forward appears obvious. Clearly, being a professional venture capitalist doesn’t necessarily mean someone is more qualified.
Crowdfunding is similar to crowdsourcing – where the best ideas tend to float to the top, similar to the upvoting on Reddit. Collectively, our instincts seem to be as valid as professional venture capitalists, who often pass on monster deals and regret it later. Theranos, anyone?
It’s nearly impossible for a venture capitalist to understand the full range of each entrepreneur’s capabilities in just the few minutes they spend listening to their pitch. A handful of curated slides about potential market size usually does not showcase the grit, determination and resilience – qualities of a successful founder. No wonder crowdfunded support comes with a drastically higher success rate. A founder’s community of family and friends usually has known them for years, witnessed them earn degrees as a single parent, juggle competing priorities and work passionately on their dreams.
Every founder has a dream, but most struggle to cross that dreaded Valley of Death. Currently, crowdfunding’s average raise is approximately $237,000, which is usually enough to propel the business forward and give investors an opportunity to be like Jason Calacanis, who invested $25,000 in Uber, and made $125M in its recent IPO.