Equity crowdfunding, or raising funds from both unaccredited and accredited investors, can be a great alternative to venture capital for startups. The strategy has become significantly more popular in recent years now that venture capital is harder to come by, and changes in regulations allow companies to raise more money at one time.
But even though crowdfunding is growing in prominence and offers a whole host of benefits to the startups that choose it, many VCs continue to talk negatively about the strategy. Many traditional investors feel equity crowdfunding is only for startups that can’t raise venture money. And they even deem capital raised this way as just cash that lacks the value an investor brings, be it their network that can help with hiring and connections to customers, or their own mentorship and experience.
Still, startups that have been down the crowdfunding road say that VCs are just talking their own book.
Chris Lustrino, the founder and CEO of crowdfunding data platform KingsCrowd, thinks crowdfunding definitely isn’t just for raising capital. KingsCrowd has been able to get repeat investors, customers and even talent from their crowdfunding campaigns, he told TechCrunch+, adding that he’s seen numerous other startups do the same.
“I would argue that the venture capital value-add is next to none in reality,” Lustrino said. “They want to hold on to their monopoly.”
Lustrino said every time his company raises funding through equity crowdfunding, they see a boost in new customers as people discover the platform. So it seems to me that the customer connections that VCs like to tout can also be made through crowdfunding.
James Wagoner actually had raised venture capital for his first company, but when he co-founded Joule Case, which creates an electric alternative to diesel generators, he decided to seek crowdfunding instead. Wagoner recently said on TechCrunch’s Found podcast that one of their crowdfunding investors was able to introduce them to a customer with huge potential.
“One of our investors was a senior executive at United Rentals previously, and when he saw our system, he invested right away. And then he was able to get us introduced to the senior leadership at United Rentals,” Wagoner said. “I’m excited to share that we actually just delivered our first system to United Rentals.”
Lustrino said he’s also been able to find talent through his company’s crowdfunding rounds. One of their small early investors now serves as a vice president of product.
“A guy just invested in our company and we looked him up; he was writing a blog on the crowdfunding space and [we] reached out to him,” Lustrino said. “Ultimately, he’s been working for us for the last three years.”
So while VCs can open up their own professional networks to their portfolio companies, some companies have found that equity crowdfunding offers them access to a network that is better suited to their specific needs. Bailey Farren, co-founder and CEO of Perimeter, an incident response platform for first responders, said this was particularly true for her company.
Farren raised a more traditional pre-seed round from angels and VCs, but decided to take the equity crowdfunding route for the subsequent seed round after seeing how tough the fundraising environment had become. She said Perimeter ended up with numerous backers that are current or former first responders themselves.
“Many of the people that invested have connected with us not just as investors but also as first responders who face the challenges we are trying to solve,” Farren said. “We suspect this will help us reach a lot of regions that we otherwise don’t have connections in.”
She added that these investors will likely also be able to provide constructive feedback and advice better than traditional VCs, who may not have experience working with local government municipalities.
“We have found that most venture capitalists don’t have any expertise when it comes to selling to the government,” Farren said. “We thought a way to access more expertise and experience, with our business model, would be to go straight to the people who had worked with the government in some capacity.”
Don’t get me wrong: Equity crowdfunding certainly isn’t for every startup, and raising in this way comes with its own host of challenges. But companies definitely shouldn’t avoid it because of the longstanding venture myth that they will miss out on the potential value a VC investor will bring.
“In 2016, we probably saw 30 or 40 deals; this year, we will see almost 3,000,” Lustrino said. “Equity crowdfunding] was a very significant portion of our seed to Series A funding. The numbers are shifting and that old mindset is definitely changing.”
