Nov 29

HOW EQUITY CROWDFUNDING STACKs UP

By Nathan Rose, Assemble Advisory

There are numerous ways to fund the growth of business – a company can get money through product sales, through investment from friends and family, borrowing money from a bank, gaining a government grant or through seed money provided by a startup accelerator. Each of these ways will suit different businesses at different stages of their development.

Equity crowdfunding has arrived on the scene in the last few years as another alternative, with its own advantages and disadvantages. It can be quite accurately described as a “hybrid” between venture capital, and the ‘rewards’ crowdfunding offered by sites like Kickstarter. Let’s look at some of the key similarities and differences between equity crowdfunding and its two closest cousins.

Equity Crowdfunding Vs. Venture Capital

Venture capital investors can be a valuable partner as a business grows. They take an active interest in helping the company expand, providing expertize in addition to their money. This active role is one reason why some companies prefer venture capital to equity crowdfunding; they get to deal with a small number of large investors, who are highly incentivized to drive the company forward.

Equity crowdfunding has its own advantages, though. Notably, it is much better for publicity. “Crowdfunding offers more than just the money – it offers engagement, visibility and advocacy too.” says Yannig Roth of WiSEED. Customers can be gained through the exposure generated by a campaign, as can new suppliers, board members, and other partnerships. When you put your company out there in such a public forum, people can notice and be attracted to your company in so many ways. Conversely, a deal with financial investors is done behind closed doors.

Equity crowdfunding also allows for more open access, as many venture capital firms have pre-determined ideas of what they will and won’t invest in. Glowee raised €611,000 on WiSEED after trying venture capital and being turned away due to the fact Glowee didn’t seem to fit with any of their investment criteria. “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 clean-tech 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.” says Glowee’s founder and CEO Sandra Rey.

Another advantage of equity crowdfunding is the ability to more strongly retain a company’s culture. The venture capital industry is still mostly male, and tend to come from similar backgrounds – elite universities and the corporate world. Among the melting pot of diversity that entrepreneurs represent, naturally some won’t gel with this “VC culture” – these entrepreneurs are not necessarily less worthy of being funded, but submitting themselves to a culture they don’t identify with is anathema to some of them. The ability to retain full control of their company culture, by having more small investors is attractive to many startups.

Equity Crowdfunding Vs. Rewards Crowdfunding

Rewards crowdfunding and equity crowdfunding campaigns look and feel similar to each other – they have video, a public Q&A forum, and payments done through an online platform. But rewards crowdfunding offers people the chance to back you in exchange for a reward (such as a product or experience), while equity crowdfunding investors get shares in the company in exchange for the cash.

The biggest advantage of rewards crowdfunding is that the founders get to raise money without giving up any shares in their company. They gain customers, not investors. Therefore, if they go on to sell their company, the founders will not need to share the proceeds with the crowd.

There are also fewer barriers to launching a rewards crowdfunding offer. A company will not be subject to such intensive checks from the platform, and there are fewer regulations involved. This means rewards crowdfunding can be used to raise money with less time and expense involved.

There are advantages to going through with an equity crowdfunding campaign, though. For one thing, equity crowdfunding typically raises a lot more money. Yes, rewards crowdfunding campaigns have raised hundreds of thousands and even millions of dollars. But this level of uptake is very uncommon. Anyone can launch a Kickstarter campaign, but not anyone can close one with a meaningful amount of money raised. You might be the one to beat the odds, but when it comes to raises in the six figures and up, the success rate with equity crowdfunding is much higher.

Equity crowdfunding is also suitable for more types of businesses. Rewards crowdfunding can work great for B2C products, but what if you are in the business of something very expensive (like medical devices) or difficult to understand (like software)? Equity crowdfunding enables B2B businesses, more-established businesses, and businesses which aren’t naturally public-facing to raise funds.

Working Together

One great thing about equity crowdfunding is its ability to work together with these other methods. Venture capital firms and angel investors can invest in equity crowdfunding campaigns alongside the public. And many companies have done both a rewards crowdfunding campaign and an equity crowdfunding campaign to take advantage of the benefits of both (including Glowee). So think of equity crowdfunding as not being “instead of” these other methods, but instead, as being complimentary to them.


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About the Author

Nathan Rose is the founder of Assemble Advisory, a consultancy for equity crowdfunding. We help busy company founders get their information memorandums and financial models in order, and provide advice on structuring a successful equity crowdfunding campaign.