Crowdfund Your Startup or Raise VC Money?
Eighteen months ago the SEC shocked the venture capital and private investing community with new legislation around who can invest in US-based startups - no longer were these 100x returns from companies like Airbnb reserved for untouchable silicon valley VC firms, now, the general public can get a piece of these startups as early as pre-seed and angel rounds via equity crowdfunding.
Raising money as a startup is never easy, you must expect to be criticized and told no over and over, all without as much of a penny in funding. But who are these firms to tell you your idea is no good? Sometimes the people know best, and if you have a cult following or an idea that can generate a lot of support where investors may not see your secret sauce, crowdfunding is the right direction for you. Besides, why should you bend the knee to these firms in order to grow or get started?
Traditional venture capital will always dominate the market and will provide the most value-add to enable a higher likelihood of survival and success, but if the startup is equipped with how to grow past the inflection point and simply needs a capital injection (and also cant garnish VC support), crowdfunding is an excellent option.
Pros of Crowdfunding:
- You’ve probably heard of Kickstarter campaigns ten years ago, going viral simply because they gained a lot of support and dollars, and crowdfunding your startup works the same way. If its good, it will be known - visibility will be easy to gain, and as a result, traction in terms of funding as well
- If the general public loves your idea, whether you want it or not, VCs will notice it. I know a double-digit amount of firms in my own network that actively scour crowdfunding websites in order to keep an eye on trends and find interesting projects to start conversations with
- We’ve all heard it: all attention is good attention. If your startup is consumer-facing, a successful crowdfunding campaign can be more valuable in terms of the new customer pipeline than the actual raise of money, which, when budgets are tight, organic customer acquisition is an extreme blessing
- A lot of issues we see with startups within the venture capital sphere is that the founders don’t want to give up control, especially after multiple rounds, diluting their own shares, as well as giving up a board seat. This can be advantageous if the VC firm is highly aligned with the startup’s values, but retaining that control to divvy out management roles as you see fit is preferential
- When you have consumer investors, they are going to selfishly market your product not only because they believe in it, but because they are financially incentivized to do so. Having thousands of these hardcore supporters do wonders during the early growth phase
- If you can get thousands of people that aren’t well-versed in a specific industry, but simply believe in your product, this shows incredible traction for venture capitalists, and social proof is one of the greatest things a project can have by way of showing traction and future growth / sustainability
Cons of Crowdfunding:
- Failing is public, forced to build in public
- If you’re crowdfunding, you must have a level of transparency to attract investors and garner the necessary attention. While there are many advantages to building in public (which we’ve seen some incredible companies do with great success), the startup survival rate is low, and failing with so many eyeballs on you is something that many founders cannot cope with. Financials must be made available to all potential investors, which, as a startup, many are not comfortable with (as we know, 95% of startups are truly ‘faking it until they make it’)
- Since the law came into effect, the cap for raising money via crowdfunding is capped at one million dollars per year. While that may be plenty for a pre-seed round, companies wanting to scale in the series A-B range may find one million a bit limited, yet, most will max out their allotted crowdfunding amount due to more favorable terms, and raise the rest via institutional investors
- Since crowdfunding campaigns are run through specific platforms, they always take a commission for ‘brokering’ the raise, meaning paying the site a fee, of between 5 and 15 percent. While not a massive amount of money considering similar fees associated with traditional fundraises, paying out $150k of a $1mm raise is not a fun check to write, especially in the earlier stage your startup is
As seen above, the opinion at Flywheel is that if a startup has the ability and willpower to raise consumer / crowdfunded capital, they shouldn't think twice about it. If more investment is necessary to continue growth, venture capital will be there to put up more, excited since there is already an existing buzz and a built-in community of loyal and incentivized followers.