Crowdfunding platforms also minimize the costs of fundraising for theinvestor. Costs of transaction items such as legal diligence, equitydocument preparation, background checks, finders' fees and more canrun into the high six figures on an equity investment of just a fewmillion dollars. These costs don't scale down much, as a similar 75 pagesof a stock purchase agreement are needed whether you make a $1million or $100 million investment. By way of contrast, well-runcrowdfunding platforms remove these high costs from the process forindividual investors, as they standardize legal documents, backgroundchecks, and many of the other expensive process points that make itprohibitively expensive for an individual to invest in a few deals peryear. Because crowdfunding sites facilitate raises by many differentcompanies, they recognize the benefits of scale and are able to amortizecosts across many companies, so the individual investor pays nothing.
2. Current Early Stage Investing Isn't Efficient--
If costs are reduced,and participation increased, won't this just bring in more investors to'bad' investments? Or, to paraphraselast week's CongressionalTestimony of Jay Ritter, Professor of Finance at the University of Florida there are professional VCs today looking for opportunities. If good investments exist, these professionals would find them first, andthey would be funded before the "crowdfunding investors" have theopportunity. Only poor investments will remain untouched by the VCs.As I have writtenelsewhere,the early stage investment market is
remarkably homogeneous, consisting largely of wealthy men withbackgrounds in technology, looking to invest in technology-relatedbusinesses.