Difference of Traditional VC/Angel vs. Equity Crowdfunding
A journalist recently asked what some of the differences, pros, and cons are of equity crowdfunding (Regulation Crowdfunding and Regulation A+) vs. traditional Venture Capital and Angel Investors.
Well, equity crowdfunding differs from Venture Capital (VC) in several significant ways; however, the better comparison is that equity crowdfunding is a typically more direct alternative to traditional pre-seed and seed angel investing, rather than VC, which tends to come in closer to the Series A or soon after. While equity crowdfunding (especially under Regulation A+, which allows raises up to a $50 million max) can be used by later-stage businesses, it tends to be early-stage rounds such as friends & family, pre-seed, seed, and/or bridge rounds that are most used by businesses for equity crowdfunding.
The major tradeoff for businesses who raise using equity crowdfunding instead of Venture Capital (and traditional angel investing) is that companies are trading off fewer, higher-dollar value investors (VCs/traditional angels) for a larger number of smaller investors in equity crowdfunding.
Some of the pros/cons of using equity crowdfunding instead of traditional VC/angel include:
Pros
of equity crowdfunding- Turn
your customers into long-term investors – gain hundreds (or thousands)
of brand ambassadors and brand champions to help spread the word and gain
additional traction for your brand and/or product. - Raise
equity without losing control – since most investors in equity
crowdfunding invest smaller amounts (~$100-$5000), they typically won’t
come with voting, information, pro-rata and other rights that larger
investors (e.g. $25k+ check sizes) typically demand. - Get
marketing/PR exposure – in addition to raising capital, you can get
significant marketing exposure while running crowdfunding campaigns. - Removes
traditional network and/or geographical restrictions – it doesn’t
matter if you’re in Silicon Valley or in the middle of nowhere; get in
front of hundreds of thousands of investors everywhere by making your
offer publicly available online. - Cost
of capital and/or time can be less than traditional angel or VC rounds – instead
of taking 6-12+ months to close a traditional round, some crowdfunding
campaigns can be launched in a few weeks and several have sold out in
mere days, meaning you may be able to get your round completed in less
time (and less money) than traditional VC/angel financing. - Helps
non-traditional businesses and under-represented and minority founders
raise capital – instead of trying to fit the typical “VC type” of
startup, the crowd decides what gets funded and what doesn’t. This can
help certain businesses that may not be the same type of venture-scale
businesses or who haven’t yet gained enough traction to attract VC interest.
Cons
of equity crowdfunding- Depending
on the website, you may have hundreds (or thousands) of investors on your
cap table – each funding portal handles this differently, but this
may be a deterrent for some companies. Typically, cap table management
solutions like Carta aren’t cost-effective for the smaller businesses, so
they have to come up with other innovative ways of managing the cap table. - Investor
communication can be a hassle (only if you don’t plan in advance) –
this isn’t always an issue, but if a business doesn’t consider beforehand
how they will manage communication with the hundreds or thousands of
smaller investors, this can become a major time burden for the business. - Some
VC/angels see equity crowdfunding companies as negative signaling – especially
in the early days of equity crowdfunding, there was an impression that
only companies who couldn’t raise traditional VC/angel capital would use
equity crowdfunding. However, this is very much starting to shift over
the past few years, and more companies are strategically turning to
equity crowdfunding (with some VCs/angels actually recommending it
to some companies). - You
must publicly disclose a lot of details of your business – in order
to be compliant with the regulations, businesses that use Regulation
Crowdfunding (Reg CF) have to disclose a lot of details about their business,
strategy, financials, and more. Some businesses are wary of disclosing
these details in public for fear that the competition will take advantage
of this information.
I hope this helps some founders and entrepreneurs who are considering whether equity crowdfunding or traditional angel/VC is better for them.
Founders & Entrepreneurs – what are some other pros and cons of equity crowdfunding vs. traditional angel/VC from your experience?
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