Equity Crowdfunding or Venture Capital?
The reality of crowdfunding and Venture Capital is that the two routes to raising capital are already blurring and becoming more interdependent – which when you consider the fact that equity crowdfunding in the UK as it stands today is about 5 years old is quite impressive. Success on crowdfunding platforms is now often dependent on having a lead investor willing to demonstrate their belief in your business to a significant amount but seeking validation of that belief from several other investors willing to match that amount – the one matched by the many. It is an interesting balancing act but as you will see from the three pro’s and con’s for each route listed below it can help businesses and entrepreneurs find the best from both routes and mitigate the impact of the cons.
UK Equity Crowdfunding
1)
- Pro: Pitch to potential customers
If venture capital is pitching to men in suits, crowdfunding is pitching to several thousand people who could become your customers. Some of them may invest in you and become your customers.
- Con: No secrecy
Equity crowdfunding requires a business to share its accounts, business plan and marketing strategy. If you don’t want competitors or the world to know what that is this may be a problem for you.
2)
- Pro: demonstrate that you have a hold on your market
In business circles venture capital backing counts for a great deal, but if you have raised money from hundreds, perhaps thousands of people (the crowd), you can demonstrate that you have a hold on your market. For a consumer-facing start-up this can be particularly useful.
- Con: If you are unsuccessful that will be publically visible
Sometimes the timing is wrong, or your marketing materials missed the mark. Sometimes it is that your idea just isn’t strong enough. Whatever the reason for missing a fund raising target – good or ill – what stands as public record is that you missed it and with crowdfunding that miss is visible and may get in the way of future fund raising efforts.
3)
- Pro: You are in control
When you equity crowdfund you have a lot of new, small investors. When you take Venture Capital investment you have one or two very large investors which can mean giving them a place on the Board or perhaps they will recommend a change in management. There are benefits to this too of course, but for some businesses the control that crowd fund raising offers is more attractive.
- Con: Paying commission on raised capital
Equity crowdfunding platforms make their money by helping businesses and entrepreneurs successfully fund raise. When that happens they take a commission, usually around 5% but can be as high as 15%, on the funds raised. Some also take an equity stake in the business. There are pro’s to their involvement as well of course – the management, support, visibility and administration services that the platforms offer can be invaluable – but when fund raising you should factor in that if you are successful then they will take their cut.
Venture Capital
1)
- Pro: Be stealthy
If it is strategically beneficial for your business to remain under the radar – be stealthy – then raising money from individual investors and/or firms keeps publicity to a minimum.
- Con: VC fund raising is not easy
There’s a reason why so few businesses and start-up’s raise capital this way, it really isn’t easy. You need contacts, it takes up a lot of time and it can be exceedingly difficult for anyone not already known by that community to gain access to it. That isn’t to say it isn’t possible, because it is. Nor is it to say that equity crowdfunding is easy, it isn’t. But the barriers are there and need to be factored in.
2)
- Pro: Connections and Expertise
VCs have extensive professional networks and experience of working with companies from many different sectors, facing similar or different challenges to those that your business will face. To be able to tap in to those networks and that expertise can be invaluable and VCs want to act as mentors because they have an interest in your company doing well.
- Con: Pressure to monetise
Professional investors tend to want to see returns on their investment a lot sooner. The focus of a VC investor will be on monetising your product or service as soon as possible. Indeed, many VC investors want to see proof of a revenue stream ahead of investment. Of course this isn’t a bad thing, no business should be looking to run at a loss and it is always good to be challenged, but sometimes this pressure can be out of step with the businesses development time and process or priorities. If you enter a relationship understanding what they want, not just what you want, you can better manage everyone’s expectations.
3)
- Pro: Help going to market
At some point your business may be ready to go to market. Analysts like to see that the leaders of a business understand what shareholders are looking for – growth potential, an understanding of and management of market risks and a return. Your ability to raise capital, work successfully with and pay dividends for professional venture capital investors will be in your favour.
- Con: The deal can be stacked in the VCs favour
Venture capital investors are doing deals all the time. They have legal teams, accountants and analysts. You may know your product or service better than they do, perhaps even your market, but expect them to be ahead of you on everything else. They will push for the best possible deal for them, in poker terms they can afford to be the chip bully. If dealing with a VC investor it is worth investing in a good lawyer or accountant who can help you to find the right places to push back and even the odds more towards you.
Of course what venture capital and equity crowdfunding share is a sense of community. Whilst the one offers big cheques from one source and the other a lot of little cheques from a number of sources, both help to build work of mouth and create a supportive network that your business can benefit from. Perhaps this is why blending the two proves the best of both worlds for everyone involved?
Learn more about the UKs equity crowdfunding platform’s here
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