Using Equity Crowdfunding Alongside Traditional Investment Vehicles

Equity Crowdfunding is a new and quickly growing source of funding for a company. Different from rewards-based crowdfunding found on websites such as Kickstarter, this form allows large amounts of people to purchase equity in your startup at a much lower investment floor. Rather than a small number of investors putting in large sums of money, there are large amounts of people putting in small amounts of money. This differs equity crowdfunding from many Traditional Investment Vehicles (TIVs) used for early-stage funding (i.e. venture capital, angel investing, or accelerators) because it runs a much more grassroots campaign for fundraising. If your business has been thinking of using equity crowdfunding alongside other traditional investment vehicles, there are many ways the two can complement each other and help your business achieve an abundance of meaningful growth.

To begin, here are the most notable advantages and risks of equity crowdfunding:

Advantages

First, raising money through equity crowdfunding means you are gaining market exposure at the same time as fundraising. Since the platform is based solely on small investments from many different people, the money you raise is tied to the number of people who support your product. They believe it is such a good idea that they would like to purchase equity in it, and that is promising for your business. Using this form of fundraising alongside TIVs means that your product is not only popular with the public, but it also has a business plan backed by accredited investors.

The second strength is that equity crowdfunding is great for product validation. Since the general population is investing in your company, that means that they believe in the product you are making. This validates that you are making a product or service that is useful. On top of that, they now own a portion of your company and their money is tied to its success. This could make it much easier to solicit feedback for products or services that your company is planning to put out. Crowdfunding is a great way to get a feel for how the public will react to your product, especially if only a prototype or beta is available. Again, much like with market exposure, teaming this with investments from accredited investors means that the consumer is as excited about your business as a professional investor is.

The last advantage of equity crowdfunding is that you have more flexibility in funding terms. It is up to the business owner to set the valuation, the percent of equity being given away, and the fundraising amount desired. Flexibility varies by the crowdfunding platform used, but it is still largely up to the founder. The only universal stipulation is that the fundraising amount cannot exceed $1 million per year by law. It is important to note, though, that this strength has risks as well. Rules on some crowdfunding websites state that companies who do not reach fundraising goals get no cash infusion at all. Having an entity from a TIV back your product before going to crowdfunding means that your business will still have runway if this does happen. Using the two forms of fundraising together ensures that your business has the funds needed for sustainable growth.

Risks

Equity crowdfunding has its risks, particularly stemming from its lack of mentorship and the risks involved in raising money this way. It is because of these risks that TIVs are especially valuable to use alongside crowdfunding. When used together, you will see how investments from accredited investors and institutions counteract these risks.

The first risk is perhaps the largest, and that is the lack of professional mentorship. TIVs do not only provide the company with a cash infusion, but they also provide valuable mentorship and guidance because of their own experience. Equity crowdfunding does a great job with market exposure and product validation but has a weakness when it comes to providing the business with professional advice and guidance going forward. Most validation through crowdfunding comes only from the consumer side of the product rather than strategic advice on business-specific problems that are provided by TIVs.

The second risk is that all capital raises are made public after equity crowdfunding, even if it is a failed campaign. This means that if you do not succeed in raising money, that mishap will follow your business through other funding rounds. This will make accredited investors less likely to invest in your product if it comes out that it failed to garner the support of the public. Again, this risk is counteracted if TIVs are used before crowdfunding. Having an accredited investor already on-board before resorting to crowdfunding means that your business has professional validation even if crowdfunding does not pan out.

The last risk of equity crowdfunding is that there could be too many people with ownership at the same time. Startups need to be agile and able to make decisions quickly. Having too many cooks in the kitchen can increase the workload and potentially slow down the process of innovation. There could be thousands of investors in your company rather than just a couple of major entities. These people would need to be updated on, and satisfied with, the actions of your business. Having a professional investor back your company gives a reliable backbone to support the decisions you make while still getting product validation and support from people who supported you through crowdfunding.

Conclusion

There are many different ways to raise funds for your startup, and there are distinct benefits and risks associated with all of them. With the rise of equity crowdfunding, there is a whole new way for the masses to support a startup. But, new forms of investment come with new risks. Using TIVs alongside equity crowdfunding can counteract those risks. Using equity crowdfunding efficiently can highlight benefits already garnered by a traditional investment from a VC, accelerator, or angel investor. If your business chooses to use the two together, there are many ways that the two will complement each other and give your business the resources to accelerate growth.