Crowdfunding platforms are an exciting addition to the startup scene and are playing an ever-expanding role in the fundraising mix. The days of viewing them as fringe or marginal are long gone; Kickstarter, alone, since its 2009 launch, has seen 5.4m people pledge $918m (£563m) to fund 53,000 creative projects.
Today, few would dispute that crowdfunding has become an accepted and effective way for entrepreneurs to road-test ideas, raise their profile and get useful customer feedback in the pre-launch stage.
They also provide useful insights for VCs into how your product idea is being received by the market. It’s worth stressing that many successful campaigns on Kickstarter, Indiegogo and similar platforms have gone on to raise venture rounds.
Indeed, we have one in our portfolio, Kano, which has just raised over $1m in just a week (10x the target!). However, just like VCs, not all platforms are born equal; there are debt-based and equity-based models, as well as hybrid versions and those which enable fundraising via product ‘pre-sale’. As always, do your research first.
For all their merits, crowdfunding should not be viewed as an alternative for a venture capital investment (but rather, as a complement); there are three important considerations to bear in mind before deciding which route to pursue:
Partnership
Raising capital, regardless of where from, is not just about getting money in the bank. Just as crowdfunding is a way to build relationships with future customers early on in a company’s life, raising money from the right investor is almost as important as choosing the right co-founder.
The right VC will bring with them not only a solid understanding of the industry and an extensive network, but also a frame of reference from other portfolio investments, which can be critical for a startup’s decision-making in its early days.
The deep partnership and experience is hard to substitute with a dispersed base of individual investors.
Capital
In the early stages, where the amount to be raised is around a million or less, crowdfunding makes more sense than later on. VCs tend to invest larger amounts, continuing to invest through subsequent rounds.
An important consideration to factor into your funding strategy is your likely future capital need.
To the extent you want to retain greatest flexibility and agility vis-à-vis your competitors, partnering with the right investor that is able to support the “life cycle” of your business may equip you with an additional competitive advantage.
Governance
Early stage businesses involve layers of complexity, and founders’ days just don’t have enough hours. Startup success is correlated with reducing that burden and focusing on the core business, product and technical issues instead. Having a dispersed shareholder base may possibly add to founders’ headaches, and could be a distraction from running the business.
However, in some cases, a dispersed base of individual shareholders, who are both your customers and brand ambassadors, could be the best set-up of all.
I am hugely excited about the impact that crowdfunding platforms are having on the startup scene and beyond. We are seeing some incredible projects and products emerging thanks to them.
As long as you think carefully about the right funding vehicle for your company, there has never been a better time to be an entrepreneur than right now with such exciting choices. And if you decide to go down the crowdfunding route, it certainly doesn’t mean you’ve closed the door to future VC involvement; the right VCs will focus on the size of the opportunity and your ambition.