VC Funding vs Equity Crowdfunding

(For Startups Trying To Raise Money)

Equity crowdfunding has been touted as an alternative to VC funding for startups needing to raise money to grow.

So, to help startups decide which is best, this article weighs up the pros & cons of equity crowdfunding vs VC funding.

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The reality is, both VC funding and equity crowdfunding have their advantages and disadvantages.

After reading this article, you will be well-informed. You will be in a better position know whether VC funding or equity crowdfunding makes the most sense for you and your business. 

How To Weigh Up VC Funding vs Equity Crowdfunding

This analysis focuses on companies with strong scalability potential – disrupting existing markets or creating new ones.

For example:

  • Software
  • Fin-tech
  • Biotechnology
  • Medical devices
  • Etc…

These business models are highly innovative. They are aiming for fast growth and need to raise capital to make it happen.

Equity crowdfunding can be used for businesses beyond these – as in for more “traditional” / “main-street” companies, but VC are unlikely to be interested in anything which doesn’t have a chance of delivering a lucrative exit in the future. VC are looking for 20x, 100x, and even greater returns.

Therefore, this article is mainly designed to help those companies which *could* get VC funding, but want to know more about the equity crowdfunding alternative.

Here are 11 factors to consider before choosing how to fund your high-growth startup.

1. Type Of Marketing

Equity crowdfunding and VC funding both require a marketing outreach effort, but the *type* of marketing is different. 

  • In VC funding, it’s about knowing the right people, getting introductions, and attending pitch meetings in-person. It means going to networking events and finding out who is writing checks to invest in companies like yours. This means you have got to be based in Silicon Valley (or somewhere like it), where the main investors congregate. If you meet the right person, a VC investment can happen fairly quickly.
  • Equity crowdfunding is more of a digital marketing effort. You will be trying to reach a large number of small investors, using pay-per-click advertising, e-mail marketing, etc. Therefore, equity crowdfunding can work for companies based outside the main VC hubs. Still, preparing a campaign is a big job. It usually takes a few months (at a minimum) to pull off.

So, whether to choose VC funding or equity funding partly depends on the kind of marketing you prefer to do – in-person, or digital.

2. Investor Motivations

Generally, VC firms are motivated purely by financial returns. This is because VCs are investing on behalf of those who contributed to their fund. Therefore, they have a duty to maximize the profit of that fund.

Though crowd investors do look at the potential financial returns, their motivations can be non-financial to a  much greater extent. Crowd investors can be looking at it from a goodwill standpoint – for instance, they love the product, or they love the idea.

As the crowd is investing for these sorts of non-financial reasons, their real motivation is part of a broader trend of people choosing to use their money to change the world for the better. It means that equity crowdfunding can be particularly powerful for social-impact / mission-driven companies, which are trying to do more than maximize their financial bottom-line. 

3. Cultural Fit

Alicja Chlebna runs Naturalbox, a company which delivers ethically-sourced organic snacks, healthcare and beauty products. She raised €212,000 through equity crowdfunding. Explaining why she did it that way, rather than get money from a bank, or VC funding, Alicja said: 

“No banker would share the passion I have for my business. And most venture capitalists are pretty arrogant, greedy and difficult to work with, from what I know.”

Strong words, but Alicja isn’t alone in feeling this way. Now, let’s be clear that not all venture capitalists fit that description – there are many great people in VC funding who generate win-win environments for themselves and the companies they work with.

But if a company doesn’t identify with the VC culture, equity crowdfunding allows a company to maintain its own identity. Equity crowdfunding brings in lots of small shareholders (none of whom are too influential) rather than in VC funding where the few very large ones are going to want to throw their weight around once they are invested.

4. VC Funding Restrictions

VCs have internal criteria for the funds they run. This can cut out certain companies, even if they are highly scalable / disruptive.

For example, Sandra Rey’s attempts to reach out to VC funding were frustrated by the fact her company (Glowee) didn’t seem to fit with any VC firm she approached. As Rey explained: 

“We have a very new and disruptive product – Glowee uses biotechnology to generate biological lighting. But when we were going to biotech venture capitalists, we were told that we weren’t purely biotech enough. When we went to cleantech funds, they said they didn’t help with companies in the biotech space. Glowee just didn’t fit with the parameters they had already decided on.”

There is far more flexibility in equity crowdfunding vs VC funding. As long as it’s potentially profitable, and has a good story behind it, the crowd can make up their own mind whether it is worthy of getting funding.

5. Business Model Complexity

Equity crowdfunding involves a wide marketing effort. This means the “story” needs to be simple enough for laypeople to understand it. Think of business models like food & beverage, fashion, and consumer electronics. Everyone can easily grasp the how companies like these make money.

But some businesses are inherently more complex. If your company is tricky to explain in a sharp and crisp manner, then it will be hard to get much traction through a public campaign. Instead, you will need to get VC funding with someone with strong domain expertise in the field your company operates within.

This means that deep tech is hard for equity crowdfunding.

6. Equity Crowdfunding Fees

One of the real downsides of equity crowdfunding is that part of the money raised gets hived off by the platforms. These platforms connect investors with the startups raising funds, acting as a middleman. Like all middlemen, they don’t perform this role without taking their cut. 

The percentage taken varies from platform to platform, and so too do the points at which fees are charged. But typically it’s between 5 – 10% of the total capital raised. Most of this is charged as a success fee at the end of the offer, paid out of the offer proceeds.

VC funding allows the entrepreneur to keep all the money raised from their investors. However, this needs to be balanced against the potentially better valuation & deal terms which can be secured through equity crowdfunding (see below).

7. Valuation Outcomes

With equity crowdfunding, entrepreneurs get to put their terms to the crowd and ask them to say “yes” or “no”. It’s like putting a “buy now” button on a website! Versus an intensive negotiation with an experienced VC, equity crowdfunding tends to lead to a better valuation outcome for the entrepreneur.

Financial investors have bemoaned the valuations being achieved in equity crowdfunding as “unrealistic.” It’s hard to know whether to take these complaints seriously, or dismiss them as vested interests protecting their patch – the same way the traditional taxi drivers protest the advent of Uber. As Howard Marks of StartEngine Crowdfunding said: 

“How awful to think the VC’s position as the exclusive source of capital is being disrupted. Is it ironic that technology will eat its own creator?”

Caution – equity crowdfunding does not allow companies to just set whatever valuation they want to. Crowdfunding is inherently self-regulating – if you set an inflated valuation, you stand a good chance of investors rejecting your offer.

8. Investment Terms

Pavegen is a company which generates electrical power from the kinetic energy of peoples’ footsteps – truly groundbreaking technology. It is the sort of company that VC’s love, but Laurence Kemball-Cook of Pavegen decided to go with equity crowdfunding instead, raising £1.9 million. 

Here, he explains why: 

“The terms from venture capital are always restrictive. They want board seats, control, liquidation preferences, restrictive terms on the founders – all things which don’t favor the company raising money. Venture capital firms make their money by negotiating hard. That’s their job, and they are very, very good at it. So of course, they are always going to push the valuation down because it gives them more upside. By raising money through the crowd, we were able to raise the money on our own terms.”

The lesson is: Equity crowdfunding has a more entrepreneur-friendly power dynamic than VC funding.

9. Publicity Exposure

The ability to put your name out there through a public equity crowdfunding campaign can be a game-changer through the publicity it can bring. Many companies gush about the very real surge their business experienced. The exposure of equity crowdfunding can be even more valuable than the money raised!

Andre Moll heads MyCouchbox, which raised €300,000 through equity crowdfunding. Of the publicity they were able to gain, Moll said:  

“The overall impact on our business has been incredible. We got great press coverage, and a huge number of new people have heard of us as a result.”

On the other hand, publicity can be a problem too. If an equity crowdfunding offer fails, then that is a public failure. It doesn’t send the right sort of message if investors reject you in a public forum.

10. Number Of Shareholders

Some companies have reported significant increases in revenue due to bringing on board loyal shareholder advocates.

Your network becomes far larger with equity crowdfunding. This can be both a good thing and a bad thing, because more shareholders can become more work to manage. However, the best equity crowdfunding platforms put in place legal structures to simplify shareholder management – for example, grouping the crowd investors into a single holding company.

One of the requirements of listing on a public stock exchange is often shareholder spread – for instance, the company might need at least 500 different shareholders, as a minimum, before being allowed to list there. Equity crowdfunding is an excellent way to achieve this, very rapidly.

11. Smart Money vs. Passive Investors

One of the “value-adds” of VC funding is their greater level of engagement. Their large investment gives them an incentive to try to help the company in any way they can. They do this in many ways, such as through making introductions to relevant customers & suppliers, and providing input into company strategy at board level. Crowd investors are typically more passive.

However, when a company runs an equity crowdfunding campaign, large investors aren’t excluded! Far from it. In fact, the platforms will encourage you to bring on financial investors as part of your raise.

Equity crowdfunding can be *as well as* smart money investors, not *instead* of them. Equity crowdfunding allows both types of investors to participate at the same time – getting the best of both worlds!

Next Steps

If you want to learn more about VC funding and equity crowdfunding, the next step is to watch the Equity Crowdfunding Video Training walk-through, which you can access for FREE by clicking here.

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