Equity crowdfunding is growing, and fast becoming a real alternative to raising Venture Capital. Crowdcube have just claimed their first crowdfunded exit. After closing our own £2M crowdfunding round in June, we’ve been bombarded by founders and VCs asking us to share our story and hear what we learned.
We have great existing institutional investors and have raised multiple VC rounds before, in this and other businesses, so we know both sides. So here it is, a founder’s guide to crowdfunding vs VC.
Our crowdfunding experience
“This event was off the charts”
Gary Vaynerchuk was so impressed with TNW Conference 2016 he paused mid-talk to applaud us.
For a founder, crowdfunding is seriously hard work. It’s a huge amount of preparation, then a whirlwind of pitches, meetings, emails and phone calls. Every interaction is crucial and hard to delegate, as you don’t know if you’re speaking to a £20 or £200,000 investor. We did virtually nothing else for eight weeks, and worked every evening and weekend (investors have day jobs).
It’s also an emotional rollercoaster. People who promised to invest let you down; your competitors try to get your confidential plans and troll you on the forums; you panic that you are not going to make it; and just when you are ready to give up, your friends and family chip in and pick you up – and a ‘guardian angel’ appears from somewhere and writes a big cheque.
Beware the ‘valley of death’! Two to three weeks in, we thought we were screwed. Our campaign was creeping along at around 50 percent funded, most of which we’d lined up beforehand. We thought we had tapped out our networks and users, a couple of people had dropped out and the crowd was tumbleweeds.
We went back through our contacts and asked everyone we could think of, not just for money but for help. We cold called and worked every lead we could find hard. There were a few lifesavers who got us through that difficult point – my favourite was an inbound email through our website from ‘Harry’s mum’ (a friend who’s child goes to the same school as mine) who wanted to make a significant investment.
Then at about 75 percent funded, it all got much much easier – perhaps because of the hard work, perhaps because of the herd mentality, or just people who’d been waiting on the sidelines. In the last two weeks we flew past our target and were over the moon with the result, in terms of brand impact and the networks of our new investors, as well as the raise itself.
Do not however assume that the ‘crowd’ are anonymous people who will just come to you with their cheque books open. We got almost three quarters of our funding from people we brought to the platform ourselves in one way or another – and had to work the inbound enquiries from the crowd hard too.
My five key tips for founders considering crowdfunding:
- Do your homework up front – get your pitch nailed and a day-by-day plan of action!
2. Get ready to mine your network – gather every contact you have in a mailchimp list!
3. Always be selling – funding is just one great big sales pipeline
4. Don’t lose heart – push through the Valley of Death
5. Don’t be a loner – use your friends, family, team to help you
Why Venture Capital still makes sense for many
A year or so ago we thought crowdfunding was for losers, and there is still a kudos to a round with a brand name VC. But the landscape is changing. In our case we turned away several VC offers, and I know from other VCs and founders that I‘ve spoken to that this choice is becoming more common.
However, there are still reputational risks if you are not super transparent with retail investors that could come back to bite you later, and risks like in any round of raising at too high a valuation. VCs are more sophisticated, and better validation of your real progress and chances of success. You will learn from those meetings, tough though they may be.
All of the hard work of crowdfunding is also building your brand – where the work with lawyers and pitching to partners in board rooms to do a VC round may be less so. The questions you get are actually pretty similar – market, team, idea, traction – but VCs will probe deeper. A crowd campaign has a fixed timeline but that can be a rope to hang yourself on to.
Venture Capital still beats crowdfunding hands down for companies where the following four factors matter most:
- Scale – crowdfunding is still limited on round size by the number of active investors, and there is also a regulatory 5M euro limit. VCs can do much bigger rounds if they see the billion dollar opportunity.
- Board/connections/legitimacy – VCs bring this, and without it a purely crowdfunded business might suffer.
- Network – can you find the 50-75 percent of your target raise you need from your own network or user base? If not, VC may be your only option.
- Follow on capacity – can you rely on the crowd for your next fundraising round? How much funding might you need?
The right individuals at VC firms can also offer their own individual experience and connections to bring to a board, help with future capital-raising, and portfolio services.
We have great VCs on our Board, and the calibre of London characters has improved a lot over the last few years, but there are also still some others out there who act like investment bankers. In some cases, sharp practises can be expected – after all, VC funds are there to get a return.
But if you want entrepreneurs to choose to work with you rather than the crowd, as a VC you need to treat them well and work hard to build your reputation as added-value and founder-friendly.
For the founder – here are four signs you may be talking to the ‘wrong type’ of VC:
- You are being emailed and called up by very junior analysts or associates who want to ‘find out more’ about your business so they can present it to their boss.
- You are playing PA tennis. The PA says ‘Trevor is very busy and out of the country for five weeks and can only meet you at our office in the City at 10pm’ when Trevor told you he wanted to meet you this week at your office at your convenience.
- You’re invited to a partner meeting and spend all night preparing. You wait outside for an hour, then come in to a room full of shiny suits. Nobody introduces themselves, and after a bit of furious Blackberry tapping, the conversation begins ‘so what do you do again?’
- You are descended on by hordes of data analysts carrying out endless due diligence (after telling you that they do very little DD, ‘we invest more like angels’). Can you provide a variance analysis on why your December cohort 5th month retention dipped in Kazakhstan? Nooooooo.
Jokes aside, you find you are spending a lot of time with people who you don’t think understand your business or can add value to it, yet alone you enjoy hanging out with. That’s not healthy.
In summary, it’s my opinion that VCs are going to face increasing competition at Series A from equity crowdfunding, which may be a good thing that spurs them to build their founder-friendly reputations and added value. There is room for both, and risks for founders from both routes, but in a very dynamic marketplace it will be interesting to see how the next 12 months play out.
Image credit: Shutterstock