A recent TechCrunch blog article shone a spotlight on the added value of crowdfunding beyond raising capital and offered a comparison between crowdfunding and venture capital. A certain climate of hostility and opposition, in fact, is perceived among advocates of each of these two modes of growth available to young companies.
As we have stated many times, the ideal financing strategy for a business is to use a mix of financing sources. Different instruments can be combined to maximize their effectiveness, or the best means can be chosen for each life stage and need of the business. A priori juxtapositions and exclusions are not efficient.
But this "Crowdfunding vs Venture Capital" clash is an interesting opportunity to compare the two forms of capital raising and highlight their differences, similarities, advantages and disadvantages.
Crowdfunding and Venture Capital Compared
Crowdfunding is capital raising that takes place online and relies on a user base consisting mainly of non-professional (or "unsophisticated") investors. Companies raising capital through crowdfunding must do targeted marketing to engage customers and potential customers and other stakeholders in the project until they become investors.
Venture capital, on the other hand, is a form of professional investment: these are specialized investment funds that a company can turn to for capital and access to useful expertise. The composition includes a majority of professional or institutional investors, but may also include ordinary investors.
The big difference between the two is that in crowdfunding, the company has more decision-making power: it chooses to do the campaign, when and how to do it, what to offer investors, and how to use the capital raised. In the second case, on the other hand, it is the venture capital fund that selects which companies to support, how and in which direction, while sharing the strategy with the top management of the company. The decision-making power has to be shared with the fund. This, of course, implies more work and effort for the enterprise in the first case and less in the second.
Another key difference is accessibility: anyone (or almost anyone) can do crowdfunding, while only companies that pass the selections are able to obtain Venture Capital backing. The latter prefer companies with a high rate of innovation and scalable businesses.
In addition, capital becomes available immediately after a crowdfunding campaign, whereas with a Venture Capital fund it is disbursed in several different tranches over months or years. On average, the capital raised through crowdfunding is less than that provided by Venture Capital funds. If crowdfunding is done efficiently and forward-looking, however, with multiple successive campaigns, it is possible for a company to raise the same amount of capital in the same time period as it would have with a VC.
Finally, Crowdfunding and Venture Capital also have elements in common, first and foremost the target audience, which includes mainly young companies (startups and SMEs).
Added value: the Venture Capital perspective
The TechCrunch article reports the views of many venture capitalists who consider crowdfunding the fallback for companies that cannot access venture capital funds. According to the position of these traditional investors, crowdfunding is an ephemeral tool that cannot support long-term growth. The reason would be the lack of the added value that venture capitalists consider their own prerogative: networks of professional and business contacts, mentorship and expertise.
In fact, companies that get support from a venture capital fund also receive strategic advice, tools and workspaces, skills training, and can be included in the network of useful contacts that the fund has built up over time.
The fund's interest is to grow the companies in its portfolio to stand out within their target industry and increase in value until they become attractive for an exit.
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Added value: the crowdfunding perspective
Crowdfunding advocates, whose views TechCrunch adopts, in contrast point to the position of venture capitalists as specious and aimed only at defending their business model.
By collecting the experiences of entrepreneurs who have done crowdfunding campaigns, it emerges that crowdfunding is also not merely raising capital without any other added value. On the contrary, many startups and SMEs say they have gained "recurring investors, customers and even talent" through crowdfunding.
Crowdfunding, in fact, is a marketing operation that targets the company's stakeholders, mainly customers, and takes advantage of a privileged showcase, that of the crowdfunding platform. On this showcase, there is hardly a company's competitor running a campaign at the same time, so it is easier to attract attention. Visibility that is leveraged to build a solid community of people who can be both customers and investors. In b2b, this sometimes means being able to forge very valuable partnerships or supply agreements. Moreover, through crowdfunding it is also possible to reach institutional investors.
Not only that: testimonials report that many crowdfunding campaigns have also led to coming into contact with useful business professionals who have become first investors and then collaborators.
With crowdfunding, moreover, you are hitting a very specific target that is circumscribed to the company's own area of action and interest, whereas venture capital networks are usually more generalist. Often these funds specialize in certain economic sectors, but hardly in a specific business.
Moreover, the potential network of crowdfunding is much wider than that of venture capital, because this mode of raising capital appeals to a broader, cross-sectional audience.
Crowdfunding vs. venture capital: possible alliances
As anticipated at the beginning of the article, the comparison between crowdfunding and Venture Capital need not be one of challenge and opposition. The same TechCrunch article points out that many of the entrepreneurs interviewed took a "mixed" financing path: first a Venture Capital fund, then crowdfunding, or vice versa, depending on the contingent goal, the possibilities open to them, and the stage of the company's life.
Crowdfunding, for example, can be a great consolidation tool for a startup that needs to strengthen metrics and skills to present itself more reliably and promisingly to a venture capital fund. Or, conversely, it can be a way to leverage the skills learned and contacts built through a growth path with a VC fund.
What do we learn from this comparison?
- Neither Crowdfunding nor Venture Capital is always suitable for any startup or SME;
- Both add value over capital alone;
- Added value is not something that is passively received; rather, it depends greatly on the ability to take advantage of opportunities;
- Reasoning by exclusion is limiting and inefficient.
The most forward-looking strategy is to learn about all your options and make capital raising a business asset.
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