Crowdfunding is not going to work but it points to new ways forward in the structure of enterprise funding.

Crowdfunding is suddenly getting much picked-up by the media and uncritically being heralded, particularly by writers of a leftist/non-business leaning, as a democratisation of corporate finance and a disintermediation of the loathed vulture capitalists.

It is also being re-tweeted and blogged about ad nauseum.

Crowdfunding is the practice of marrying smaller to mid-scale private placements to the communications reach of the web and allied social media.

Be very clear that whatever the claims, crowdfunding is simply wider dispersal private placement using modern communications platforms.

Here are the problems:

1. Lack of evaluative capacity: sectoral specific business angels and specialist VCs might not hand out their money easily (and many might say that’s an understatement) but, by and large, the better ones know what they are looking at to some extent and can reach at least a somewhat informed opinion.

2. Lack of funding capacity: high net worth investors, angel groups and VCs can put large sums into enterprises. It is unlikely that groups of generalist, smaller investors can reach sizeable sums. One could think of crowdfunding as mini-IPOs (initial public offerings).

Conventional IPOs are usually anchored by heavy hitting investment banks and, to various degrees, open to as vast a pool of other investors as is felt necessary to put an offering away. Even with the much smaller scale of a crowdfunding candidate, it is highly unlikely that major sums can be reached. Even if some money is raised, there is a significant risk of underfunding.

3. Lack of Quality of Money: let me give you an example; Makeurmove is a fast growing company in which I am personally an investor and a non-exec (it allows landlords to advertise rental property free). We are just completing our third investment round from a small spread of value-adding initial investors, all from our broad personal circles. Because we all understand what is going on, we have been able to make significantly bigger personal commitments than might otherwise have been the case. The company’s equity is still tightly held and, subject to all the normal commercial trials and tribulations of an earlier stage company, we have maintained a big element of control and choice over our funding options. If and when we raise further cash it will probably be from strategic trade investors, massively leveraging extra value from any further dilution. It is vital to understand that Quality of Money (a corporate finance evaluative theory of Funding Enterprise) is at least as important as the raw quantity of money alone.

- Those are the reasons why Crowdfunding as it is has now emerged will struggle to achieve anything useful. However, it points the way towards the ongoing marketplace issues in these areas:

1.Banking provision: the banks have retrenched from quasi-venture funding and will not be re-entering that market any time soon.
2.VC preference for investments which are in reality second or third stage, leaving an underprovision at seed and earlier stage.
3.The elitist provision of earliest stage funding: without Friends & Family inputs, plus the cultural and professional networks to access first and second stage external investments, many projects will struggle.
4.Choice: it is particularly a regional issue whereby only one or two funders may be options for earlier stage projects. This is unlikely to be healthy.
5.A latent desire by many people to take a punt on enterprise investment. There are far fewer with the necessary spare cash at the moment but their numbers is still significant.
I believe that crowdfunding is not going to produce robust and effective solutions to these issues – and others – within enterprise funding. Other mechanisms will need to be found – and they may emerge as a basket of complementary measures on several fronts, including micro-capitalisation, state-backed lending/venture provision, smoother and expanded tax-driven investment vehicles and broader environmental enablers, such as a much higher degree of vocational and enterprise-focused education.

Enterprise is an exciting area. It is the thrill of innovation and creative action overlayered with the heady prospect of vast riches. Legions of pundits, punters and self-styled experts already mill around its peripheries. Unfortunately, the crowdfunders, as presently constituted, are just cluttering up the picture a little bit more, even as they point to the underlying problems.

The requirement, though, is absolutely clear: serious capital and serious enterprise need to interact in better and more productive ways.

- Author Malcolm Evans is a founder of http://corporatefinancenorthwest.org