Crowdfunding vs VC Money – an entrepreneur’s perspective

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The Next Web by Doug Munro | August 1, 2015

Crowdfunding VC money

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

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.

Related: Why Crowdfunding Campaigns Fail (And What Can Be Done)

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.

Related: Where to Focus BEFORE Raising Capital

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:

  1. 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.

View: Trends Show Crowdfunding To Surpass VC in 2016

Venture Capital still beats crowdfunding hands down for companies where the following four factors matter most:

  1. 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.
  2. Board/connections/legitimacy – VCs bring this, and without it a purely crowdfunded business might suffer.
  3. 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.
  4. 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.

Related: Crowdfunding vs. VC seed rounds: Which makes sense?

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.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country.  NCFA Canada provides education, research, leadership, support and networking opportunities to over 1100+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada.  Learn more About Us or visit www.ncfacanada.org.

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