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Crowdfunding and the Bad Dancer

Michael Sonenshine December 15, 2015

Crowd funding websites are the modern day equivalent of this new breed of reality TV shows. Very often the business that gets funded is not the best business, but merely the most popular business. This, is where the parallel ends, however. 

Dance contests usually follow a predictable pattern. Bad dancers are eliminated early in the competition. Good dancers progress through the rounds. Eventually one of the best pairs wins. But something funny on the way to the forum happens when the crowd vote is counted. Bad but popular dancers can reach the finals at the expense of much better dancers who, but for the crowd, would have progressed. The success of the bad but popular dancer is certainly not something fans of good dancing approve of, but at the end of the day TV is entertainment. The duel between style and substance certainly makes for an interesting program. All in all, everyone wins. TV producers get advertising revenues and viewers get an engaging entertainment experience.

But when it comes to investing popular will of the crowd the dynamic of mutual success between supplier and customer breaks down. Crowdfunding websites dangle in front of investors the prospect of investment rewards and the satisfaction that comes from helping an entrepreneur get started. The companies raising money couple that appeal with presentations that are long on style and often short on substance.

Dancing is a transparent business. You see the presentation and you can instantly tell if the product or service is good or bad. This is not true with startup and early stage companies. What drives the success of a crowdfuning campaign is often not the detail of the company, but the packaging and the presentation, combined with the fact that people are naturally more willing to risk a small sum of money for the sport of it than to drill down into the detail and risk a larger sum of money.

The successful crowd funding campaign ends with money in the company's treasury and profits for the website provider. I've yet to see hard evidence that investors benefit, however. In the investment business when form takes a back seat to substance investors usually wind up losing their money.

The math I see is that at least half of startup and early stage companies fail within five years. An investor who gets an average return of 25% annum will see $100 turn into $244 in five years. If, however, half the companies fail the other half of the companies much produce each a return of 4X in order for investors to clear the 25% hurdle.

My advice is as follows: Investors should approach crowd funded investments with a healthy dose of scepticism. Ask questions - lots of them! Be selective. AND provide the possibility for an exit within five years.

Back to our StarDance. My rationale is perhaps naive. The way I figure, the majority of the TV viewers want to see the quality dancer win. Each week there are fewer good dancers to choose from, so the majority that want to see the good dancer win will finally be able to cheer for the substance and form it desires.

After all, dancing is certainly not the same as crowdfunding. Is it?

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Michael Sonenshine
Michael Sonenshine
Chief Executive Officer, Symfonie Capital
Mr. Sonenshine is the founding partner of the Symfonie Capital, LLC and the Investment Principal primarily responsible for managing credit products focusing on Global High Yield markets both in Western Europe and Eastern Europe. He is the architect driving the establishment of a Peer to Peer lending platform in Central Europe, under the SymCredit and SymVest brands. He also leads the investment committee for the Symfonie Angel Venture Fund, the Symfonie Lending Fund. Before founding Symfonie Mr. Sonenshine was for selection of investments in credit instruments, both performing as well as distressed. Prior to joining MT Thaler Mr. Sonenshine held senior credit research positions at Credit Suisse First Boston and ING Bank.