Since the opening of public debt and equity crowdfunding portals in 2016, the dollar volume of deal flow has climbed steadily...
What is the Difference between debt & equity crowdfunding and, say, Indiegogo or GoFundMe?
There's Crowdfunding, and then there's Crowdfunding... Confusingly, there exists three kinds of websites all calling themselves "crowdfunding":
These Reg CF crowdfunding portals - of which WeFunder, NextSeed, Kiva, and Crowdfund Mainstreet are amongst our favorites - allow every day individuals to actually invest, which we like. We believe that investing opportunities that are well researched, vetted, and communicated should be made available to anyone who wants to invest - as opposed to being available to only "Accredited Investors" aka those who have wealth. We see the various evolutions of crowdfunding as an incredible opportunity to democratize investing and engage everyday citizens in the ownership of good, sustainable businesses.
Crowdfunding is an Actual Opportunity
Increasingly, we're seeing the number and size of private equity transactions increase dramatically. The graph below - from Pitchbook - illustrates this growth. 70% of all Venture Capital deals are on average $1+ million.
While the number of large deals ($1+ million) is increasing, smaller deals under $500k+ have been on a steady decline since 2013. Ron Weiner of iMovr explains the reasons behind this in his article Equity Crowdfunding is Eroding the Best Returns VC Funds Used to Enjoy
"According to Cooley’s VC trends, the median Series A valuation has moved up from $16.5 million to $23.0 million in just the past two years. VCs aren’t just competing for fewer early-stage deals, they’re also paying a lot more for them. Around the time that orange became the new black, seed rounds became the new Series A, with valuations doubling between 2012 and 2017, according to Pitchbook. (What used to be called seed-stage is now termed “pre-seed.”)"
As VC moves out of smaller deals, there are opportunities for smaller companies who have unmet capital needs to find private equity funds. Crowdfunding is well positioned to capture this capital market, and do it in a way that's more sustainable, democratic, and fair to entrepreneurs than VC could ever hope to be.
Foundational Shifts in Angel Investing
Just as there has been change in the VC landscape scaling to larger and larger deals, Angel Investing is experiencing shifts of its own. Crowdfunding Portals offer a way for Angel Investors to streamline the way deals are communicated and discussed - a major roadblock for many Angel Investors today. Often, Angel Networks operate through a hodgepodge of emails, webpages, and disconnected spreadsheets. For investors that don't have the time, money, and connections to manage their investment portfolio, they are often left to invest their wealth in VC's or Funds where they lose control of their influence and participation in companies.
Crowdfunding Portals offer an elegant, simple way for Angel Investors to see, discuss, and share deals through a formal, intentional network of both Accredited and UN-Accredited investors. Many portals - like WeFunder and NextSeed - offer support services to companies looking to fundraise responsibly. We see these as ultimate benefits to Angel Investors who get to choose what they invest in, have access to communicate with the company and other investors, and have assurances about the veracity of a deal.
Smart companies don't just take money from anyone who wants to throw money at them - they want strategic partners as investors; individuals and organizations that are able to add value to the capital they provide in the form of expertise, connections, and strategic guidance.
An advantage of raising funds through Crowdfunding is that companies often have a large number of individuals who are invested in seeing your company succeed. They're excited to invest in the company, even if it's only $100. These investors often become champions, cheerleaders, and advocates for the success of your company. They are a group who can then be strategically activated to get out a message, fulfill a specific call to action, or be a bedrock for future fundraising rounds. We like that.
Access to capital for small companies and access to deals for unaccredited investors involves real issues around equitable access to power, opportunity, and resources. With most VC's and financial instruments being developed by and for certain privileged segments of the population (white and male, predominantly, excluding women and people of color), we see Crowdfunding as a great way to shatter some of these barriers and provide onramps to more people who would, in fact, like access to said power, opportunity, and resources.
Risks of Crowdfunding
Crowdfunding is new: Like any new and novel technology, there are always risks. The biggest risk is that it's exactly that: new. There hasn't been enough time to see the lifetime of many deals - from conception, to diligence, to raise, to deployment, to repayment, to closing out. A wise man once pointed out that the best clarity is the type that's discovered through implementation.
Large Cap Tables: As discussed in the aforementioned section, there are benefits to having many advocates invested in the success of your company. The flipside of that is that you have many, many investors that can muddy a cap table. Fortunately, Crowdfunding Portals like WeFunder create a Special Purpose Vehicle (SPV) to aggregate owners and manage funds raised through their portal, but this is an issue to keep an eye on as Crowdfunding evolves.
Malicious raises: Not all deals are vetted equally across Crowdfunding portals. We've seen some deals that seem to have equitable terms for investors and the company, and we've also seen some terms that seem very risky for investors.
Uneducated investors: Which leads us to our last risk: new investors - accredited or un-accredited - can be taken advantage of pretty readily without the right facilitation from Crowdfunding Portals. Proactive investor education is, and will be, fundamental to the success of Crowdfunding to ensure a level playing field for investors and companies.
Articles we like on Crowdfunding
CHIPIN, "Crowdfunding: Is it a Threat to VCs?"
Venture Beat, "Equity Crowdfunding is Eroding the Best Returns VC Funds Used to Enjoy"