Emergence Of Incubators And Early Financing Led To Crowdfunding Growth

In recent years, funding mechanisms similar to Crowdfunding with an incubator style of operation have been increasing in number across the board. Popularized by companies like Y Combinator, which was founded in 2005 by Paul Graham and others, several individuals and affinity groups have taken the thread of funding and creating small capital investment startups, in example, Y Combinator rarely makes an investment larger than $20,000.

At Stanford, SSE Labs is a startup accelerator created by students and modeled after Y Combinator, although it has no equity positions in its startups. Seems lke these incubators were the initial phase of Crowdfunding. Recent trends seem to Crowdfunding incubatorsprove that at least once a week, a new startup incubator is created. These incubators have been a very important answer to a shared problem set with the lack of real options for equity focused crowdfunding opportunities. These are, in a way, close relatives to crowd funding, but is about to get much close. Firstly, we will discuss some of the problems with the incubator-style funding mechanisms moving forward.

The first of these issues is their narrow view within the gathered knowledge and wisdom of the crowd and is almost always constrained by geography and the multitude of incubators over that particular area.  In the recent past, the argument could be made that this would work in local areas as long as all of the right pieces lived in the same locality. But this is an era of cross-disciplines and geographic scattering and it’s not what it used to be 10 years ago. The necessary pieces of the puzzle are tossed to the wind, but it’s the outlier pieces need to complete powerful plans that are in complete obscure locations.

Creating a model that relies on a smaller and smaller cross-section of collected knowledge, is a pattern that the venture capital community has followed for the past half century.

The power of the crowd and it’s crowdfunding capabilities is simply not just accessing the best ideas, but as will be discussed later with prediction markets, also about using the collective knowledge and experience as a sorting and leading indicator mechanism.

Also the crowd has the power to crowdfund projects that usually are being disregarded by incubators and venture capital. This allows for crowd scalability and that is what kills many early startups. Dividing and distributing the crowd by lines created by today’s incubators is not only unnatural, but also antithetical to using the full potential of the crowd.  Incubators and other seed-stage funding creations are absolutely required for the short-term, simply because nothing better has been created to replace them. Yet with the integration of crowdfunding dynamics, it is a topic soon to be resolved.

When dealing with incubators, another issue one must be very aware of is that these seed only financers can be easily out maneuvered by downstream companies. Unless the market has been obvious about its demands, one can be tossed aside when needing to raise more capital. Getting original funding doesn’t guarantee further funding, provided that funding is deserved.  These points are voiced by George van Heogaerden of the Venture Company, who argues for a model that funds startups from start to completion, a monolithic funding strategy.

A better model such as crowdfunding would be one that facilitates a rolling close and offer greater exposure to a larger crowd.

This essentially offers better funding continuity because it ensures higher exposure continuity. The name brand incubators understand this to the extent by naturally gaining more players, but could likely diffuse as the incubators increase their population. Barring major disaster, the crowdfunding model will launch the next mega companies.  The “open-sourcing” of deal contracts is one of the promising by-products of early phase funding from the past few years. Most assuredly, eliminating the inefficiencies of the innovation process will help create more innovation.  As well, with funding innovation moving to the logical direction of using a wider and better collected source of resources, i.e. crowdfunding, it allows a more direct mechanism for creating deal terms. This is key component for any large scale funding body to possess and crowdfunding has it all.

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