Why Smart VCs Love Equity Crowdfunding & Why You’ve Heard Otherwise
Yes, you heard it from me: smart VCs love companies who raise capital from the crowd under regulation crowdfunding and Reg. A+. I firmly believe that top-tier investment firms, like Y Combinator and Draper Associates, recognize the benefits of backing companies who’ve successfully raised from the crowd because these businesses have demonstrated shrewd marketing and strong product-market fit.
So, why are you hearing the opposite?
Second tier firms are often nervous about crowdfunding because it opens a Pandora’s box. If they’ve invested in a company that goes on to raise from the crowd and fails, then their investment can go south to zero. But this thinking is backwards, and it turns out that many VCs are making bets without knowing if their portfolio companies’ products or services will find an audience. Why not instead test product-market fit with the crowd – after all, consumers-turned-investors are bound to have something to say.
On the other hand, I find that a smart VC will welcome a successful equity crowdfunding campaign and feel more comfortable with their investment for it. At the end of the day, they can still dictate their terms and conditions, only now with the confidence that their prospective investment has found an audience. For smart firms, this can be very appealing.
The takeaway:
Equity crowdfunding involves risk, yes, but so do traditional funding rounds. If you don’t get a term sheet right away, VCs will look at this negatively. They’ll likely think: Everyone has looked at it and still no buyer. Either way, you have to make a decision on how to capitalize your company. And with equity crowdfunding, you have considerably more control over the terms. With a VC you don’t.
We’re still in our early days and, even though thousands of companies have successfully raised through the crowd, it can feel like the jury’s still out on equity crowdfunding. When will the tide change? I think the waters are shifting already as equity crowdfunding enters the mainstream. Fairly soon the conversation with VCs – and any other investor, for that matter – will be simple: The crowd loves us and so will you. Pretty compelling.
