Crowdfunding: The better business incubator?

Oculus and others are proof that even after the crowdfunding process ends, money continues to change hands. 

Last month, for example, LIFX, whose Wi-Fi enabled multicolor LED lightbulbs raised $1.3 million from backers in November 2012, secured a $12 million Series A funding round led by Sequoia Capital (bringing the company's total equity funding to $16.6 million).

Formlabs, whose 3-D printer reached its goal in three hours in 2012, ultimately raising nearly $3 million via crowdfunding, received $19 million in Series A funding in the fall of 2013. That same year, the OUYA game console secured $15 million from Mayfield Fund, Kleiner Perkins Caufield & Byers and others. And Pebble, a smartwatch developed by Pebble Technology that was rejected by numerous venture capitalists, later picked up $15 million from Charles River Ventures after its enormously successful Kickstarter campaign.

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One of the advantages of a successful Kickstarter is it gives companies a chance to clearly demonstrate the demand for their product. The consumer investment they attract to help refine and move their product closer toward a finished state means angel investors and venture capitalists don't have to risk as much capital.

"Proof of demand is nice, but the funding to support the early product development is even nicer," said Brad Feld, an early-stage investor and managing director of Foundry Group. "It means that start-up can get a hardware product further down the road—more of an MVP equivalent in software—before going out to raise money."

A virtual testing ground

Crowdfunding in and of itself, though, isn't yet a preferred screening tool for many venture capitalists, although they do acknowledge it has its advantages.

"There are a variety of factors that go into an investment (team, market, product, etc. ...) and I would say that crowdfunding campaigns provide an additional factor, but they do not really outweigh the others," said Omar Hamoui, a partner at Sequoia Capital. "Showing proof of demand is the key advantage. Even with this, though, we frequently think about whether crowdfunding results are proof of deep and enduring demand or whether it is a shallow pool of early adopters."

http://www.cnbc.com/id/101845283