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More Investors…Fewer Problems?

August 8, 2022 3 min read

More Investors…Fewer Problems?

Mr. Wonderful here,

Founders considering equity crowdfunding often tell me, “Kevin, I have a tough time answering my institutional investors’ calls every other day, and that’s only five people. How do I manage 35,000?”

It can be tempting to think that more investors automatically equate to more headaches, but I’m here to tell you raising via the crowd doesn’t have to be a migraine.

Quite the opposite…

When comparing funding sources, you have to look at the features and control provisions.

A traditional venture fund will generally want a proprietary position, sitting on top of the founders’ and any early investors’ shares. Basically, they want special treatment, usually in the form of preferred shares and liquidity covenants that put the likes of me first in line for any returns.

By contrast, if you use equity crowdfunding, you can issue shares that are identical to all other shares outstanding. Let’s pause to consider that for a moment – that means:

  • Your cap table stays easy to understand and you retain control.
  • You also avoid the often brutal dilution that comes with special liquidity rights.
  • No awkward phone calls with early backers to disclose new covenants with a VC firm.

When raising through the crowd, your investor and customer base are often the same, which makes them very sticky and prone to taking the long view (i.e. they’re often less likely than institutional investors to push you into a liquidity event down the line). After all, these are frequently the people who bought your vision in the first place.

Aren’t community raises a lot more work, though?

Let’s not sugarcoat – equity crowdfunding is work, with substantial effort often needed to launch a campaign and market to prospective investors. Then again, so is pitching VCs. 

Running around to 30, 40, or sometimes more firms in search of a big check can represent hundreds of hours spent with slim chances of success (especially in a down market). On equity crowdfunding, however, you can raise funds in very small increments, which is much easier during tough times – say $200 from 25,000 investors instead of $5M from one.

You also have the added advantage of growing your business through your raise, again since your investors tend to be early adopters. Plus, you effectively recruit an army of enthusiastic brand ambassadors.

Conclusion:

Nothing is fundamentally wrong with VCs, hedge funds or institutional investors, and no, equity crowdfunding is not a silver bullet. But it does offer some really attractive attributes that the others rarely can:

  • You’re in the driver’s seat; you set the terms of the offer.
  • No third party has rights above you as the founder.
  • You transform customers, who already buy into your vision, into investor partners for the long haul.

Now, I don’t know about you, but investors like that would certainly be welcome on my cap table.

Kevin O’Leary is a paid spokesperson for StartEngine. View the details here.

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Kevin O’Leary is a paid spokesperson for StartEngine. Read the 17(b) disclosure here.

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