Local entrepreneurs often think it's so much easier to raise money in California.
But crowdfunding success rates raise questions about the theory that geography determines capital raising destiny. Crowdnetic.com reported third quarter 2015 success rates for issuers in the five highest volume states as follows: Illinois 29.7%; Florida 27.9%; Texas 26.7%; California 26.4% and New York 22.6%.
But success rates don't determine the volume of success. Because California had 50% of offerings in the big five states and Illinois (with the highest success rate) had only 6% of offerings, many more California businesses obtained funding. If the odds of success don't always predict the volume of economic activity, is willingness to try and fail a key ingredient to success?
Do you remember last month's $1.5 Billion lottery? Looking at Crowdfunding statistics reminded me of the lottery, because they demonstrate that you can't win if you don't play the game. Of course, choosing the game you play also has a big effect on winning and losing.
The odds of winning the lottery are about one in a trillion. The lottery isn't a capital-raising plan, because the odds are so high and after you decide to play, you really can't affect the outcome.
Traditionally, businesses have banged on the doors of venture capital funds to raise capital. But everyone knows that each venture fund only invests n few of the thousands of business plans it receives each year. The venture industry as a whole publicizes how many businesses it funds, but the industry doesn't publish how many businesses tried to raise money and failed. The venture capital success rate is better than the lottery, but not as high as entrepreneurs would like.
Crowdnetic's statistics demonstrate that the odds of raising capital through crowdfunding are a little better than 25%, which beats both the venture capital industry and the lottery. The other thing about crowdfunding is that it's a transparent industry. Everything is online. It's relatively easy to find out information compared to funding from institutions. Information is the tool you use to plan your capital-raising campaign.
Apparently, companies in the Western United States think the 25% odds are worth playing the game, because the West leads the other regions of the country in both the number of total offerings and the amount of capital raised.
That raises the question: Why would so many western businesses play the crowdfunding game, if all they have to do to raise capital is to walk down to their local Starbucks and leave with millions from all the venture capital fund managers drinking their latte Macchiato Grandes.
Venture capitalists have long proclaimed that California has so much venture capital, because California has more entrepreneurs and California entrepreneurs know how to play the game better than in other places. They certainly play the game more often.
That was the traditional venture capital game. The question now is: Will the rest of the country sit idly watching California switch from venture capital leadership to crowdfunding leadership?
If they do, they'll get no sympathy from me when they complain about California entrepreneurs getting all the money.
You decide which game you want to play, but shouldn't using the Internet to be in contact with investors all over the country help entrepreneurs in states with less venture capital more than it does entrepreneurs in states with a lot of local venture capital?
This blog post was also published in Triangle Business Journal. Jim Verdonik is an attorney with Ward and Smith, P.A. in Raleigh. He can be reached at email@example.com. Jim's newest book is a very valuable handbook for entrepreneurs, attorneys, investors, and crowdfunding industry professionals called Crowdfunding Opportunities and Challenges.