The use of crowdfunding in startup projects inevitably grows day by day as we witness the rise of social networks and their impact on how companies do business.
The general mantra in startup culture used to be “execute, execute, execute” as if a focused and rigid path could be followed from creation to market penetration. This mantra wasn’t simply the effect of the finite amount of resources from venture capital fund, it was also created by the unbendable deal terms and milestones set early in the deals. Yet this unwavering mentality had an undeniable collusions course with the quickening pace of change and has shown to be a better indication of outdated thinking than of potential success. If the world about the startup is in constant state of change, then the direction of the start up needs to be as well. While a shift in directions used to be a terminal exercise for startups, it is now a commonality.
Crowdfunding changed the game to “Pivot” is the new “Execute”
To pivot is to change directions quickly, but not a completely different direction; it usually describes a motion towards an adjacent direction. The difference between a startup being a success and a failure is the amount of pivots a startup makes before it succumbs. Robert Scoble observed “Some things that startups that aren’t run well do: You don’t change direction fast enough. Every startup should be looking at its direction every month or so.” Also Paul Graham of Y Cominator notes, “In the average Y Combinator startup, I’d guess 70% of the idea is new at the end of the first three months.” The improved saying of the startup is best expressed as “Pivot, Pivot, Pivot” as change demands to be an integral part of any endeavor.
This divergence from the old mentality held by the financiers and the new “pivot” model exposes “The execution paradox.” Startups adapting to conditions as they should are not executing predetermined milestones. Therefore, they will likely get overtaken by venture capital and downside deal terms.
Pursuing later-term deals could be considered an attempt at chasing history; meaning going after already market validated deals that have little chance of going through further changes. These low risk deals still have major consequences, even for limited investors of venture capital. For example, the intensity of competition is much higher for these “lesser” deals because of their exposure to a broader audience. It’s a simple case of high demand and low supply, thus creating higher prices for venturists to pay and less returns to follow. This model also explains how some of the big firms can still do considerably well, their “Rolodex” notoriety giving more value to the deals they choose be involved with. The focal point is that this was predictable, even destined to happen and has a few important consequences for the health of early-phase startup funding, most profoundly that obtaining such resources has become an incredibly harsh environment. Secondly, that the venture capital industry’s return will proceed to dwindle until a new mode of functional funding is created. It is believed by many that the current paradigm of venture capitalism and their firms will disappear in the next few years.
What is it about venture capital firms that prevent them from adapting to the quick changes now seen in the modern market? Another way one might phrase this is “why can’t a small group of individuals adapt to changes quickly?” if posed in a broader sense. Those individuals might stand a chance, if their only focus is navigating the many changes within a very narrow set of options. Yet, they will need to fight it out with the cross disciplinary trend which has been gaining momentum, but an item that will be discussed in more depth later.
For any venture capital’s partners or any panel of experts, the writing is on the wall; with the rise of social networks and crowdfunding they have become obsolete. With the decreased value of expertise and the exponentially growing need to be cross-versed in many disciplines, the market of tomorrow requires an encyclopedic set of knowledge and expose mixed with adaptability unseen in history. Therefore, it is not just recommended, but nearly required that those in funding consider and begin creating ways to cooperate with the crowd (perhaps joining crowdfundinginitiaties is the best way to do so) because of its predictable necessity to supply and demand. The amount of people with the necessary skills in intellect, synthesis and adaptation is destined to shrink as the world increases in complexity and rate of change. Thankfully, the crowd’s collective knowledge and intelligence grows congruent to all these variables providing enormous amount of investment capital to fund almost any crowdfunding initiative you can think of.