Alternative Investment

Venture Capital vs. Equity Crowdfunding: Which Funding Pathway is Right for You?

In February 2021, BuiltIn published the article, Venture Capital vs. Equity Crowdfunding: Which Is Better for Your Business? This article discusses the differences between venture capital and equity crowdfunding (ECF), comparing each method’s strengths and limitations to help clarify and expand upon which funding pathway is right for you.

Startup managers know the benefits of venture capital as it may seem like the leading source of funding, however it may not be the correct practice of fundraising for their business. Since the COVID-19 pandemic, there has been a considerable drop in startup valuations for VC. Certain VCs are investing in fewer deals, some ceasing all new investment and now choosing to distribute capital across existing portfolios to focus on the lives of those businesses.

When comparing venture capital and equity crowdfunding, a key area to take into consideration is deal flow. The roughly 1,000 VC firms in the United States made 11,000 investments in 2019 (2,500 of which were late-stage deals). Contrarily, the 54 equity crowdfunding portals in the U.S. hosted 735 Reg CF offerings in 2019. Although the total number of crowdfunding campaigns is still far lower than the number of VC investments, the annual number of deals per platform exceeds the number of VC investments per firm.

While comparing these funding pathways from a geographical perspective, 80 percent of VC money goes to companies in the five largest metro areas, compared to only 42 percent of equity crowdfunding capital. Though equity crowdfunding has not existed as a fundraising option for as long as venture capital, equity crowdfunding creates more equitable access to capital for companies in all areas of the country. We expect to see this gap widen and others to expand their capabilities and volume. When considering deal size, the average VC seed round weighs in at about $1.7 million, while the average VC Series A is $15.6 million. This can easily be replicated with equity crowdfunding, where companies raise an alternative to pre-seed and/or seed rounds under Reg CF for up to $5 million (once the maximum is raised from the current cap of $1.07 million), followed by an alternative Series A via Reg A+ for $10-15 million (out of a possible $50 million, which should increase to $75 million in the near future).

The listed pros and cons of VC and equity crowdfunding may help weigh the options of both choices and decide on the fundraising pathway for your fund. Visit the article for the full list.

Venture Capital Pros

• Deep Pockets: VCs offer startups a large amount of capital very quickly.
• Experience: VCs have years of experience as a form of capital investment, guiding high-growth companies.
• Validation: Companies that secure capital from a reputable firm gain immediate credibility and prestige

Venture Capital Cons

• Exclusivity: Less than 1 percent of companies get VC funding.
• Valuation: VCs put significant downward pressure on startup valuations to increase their upside.
• Control: VCs seek advantageous terms to gain control at the expense of founders, which can lead to scenarios where the founders are forced out against their will.

Equity Crowdfunding Pros

• Control: Companies usually offer non-voting, common shares via equity crowdfunding, allowing founders to maintain control of the company.
• Brand Ambassadors: Equity crowdfunding allows startups to build armies of hundreds (if not thousands) of investors, who then become customers and brand champions.
• Steady Capital: Equity crowdfunding allows companies to always be raising, rather than raising capital in fits and starts.

Equity Crowdfunding Cons

• No Guarantees: There is no certainty a company will meet its equity crowdfunding goal.
• Disclosures: Equity crowdfunding offerings are open to the public, companies must be transparent with financials and reporting.
• Costs: There are legal, accounting, platform and marketing costs associated with equity crowdfunding campaigns.

If you have any questions on how to approach a more equitable way to access capital and the mentioned pros and cons for these fundraising options, read the article linked above and contact Steve Vlasak.