“Who are these companies raising money online?” read the email in my inbox yesterday. “Can’t they raise money the old-fashioned way?”
Over the last few weeks, we’ve received several emails at Crowdability asking similar questions.
It seems some of our members have concerns about the quality of start-ups on crowdfunding platforms. It reminds us of the Groucho Marx quote: “I refuse to join any club that would have me as a member.”
You see, before equity crowdfunding came along (and before angel investing became a popular activity), entrepreneurs had to raise money the “old-fashioned way”: they raised it from the professional investors called Venture Capitalists (“VCs” for short).
As VCs invest a great deal of time and resources vetting potential deals — and as they’re incredibly picky — only a handful of high-quality companies would get funded.
Recently, however, there’s a new fundraising option for entrepreneurs: online platforms like AngelList and CircleUp.
Contrary to the first impression that people may have, many of the start-ups on the platforms are of similar quality to the companies raising money the old-fashioned way. In fact, in some cases, the companies on the platforms have already received funding from VCs.
The lines between the old and the new are beginning to blur — and today we’ll show you how to take advantage of it!
What’s So Great About the Old Way?
The main job of Venture Capitalists is to raise capital from a bunch of limited partners, and then carefully inject that capital into a handful of early-stage companies. But the VC’s work isn’t done after they write their checks.
As an early-stage company grows, VCs continuously offer their wisdom to the start-up’s team, and introduce them to a wide network of contacts. This helps the company make less mistakes, grow faster, and increase its overall chance of success.
But getting back to that Groucho Marx quote: with the minimum price to be a limited partner at $500,000 or more, the VC “club” is a tough one to get into.
The Benefits of a Crowd
Which brings us to equity crowdfunding.
With minimum investments of $1,000 or less, this is a club that’s open to more of us.
But make no mistake: equity crowdfunding can be a valuable opportunity for entrepreneurs as well.
“Word-of-Mouth” For Start-Ups
For entrepreneurs, raising money online — in the public eye — can create a nice dose of awareness. Everyone from potential investors to potential clients will get to know their name.
And when everyday citizens invest in a start-up, they have an economic incentive to become evangelists. Think about hundreds, or thousands, of people telling their friends about the new company they’re involved with: they become extensions of the company’s marketing efforts!
Back to Business
In addition to the publicity that comes with raising money online, entrepreneurs also opt for this route because the process can be quicker.
Whereas it might take 6 to 12 months for a start-up to raise a 7-figure round of financing from venture capitalists — especially if it’s run by first-time entrepreneurs — we’ve seen deals on equity crowdfunding platforms close in 30 days or less.
A quick close means that a start-up spends less time raising money, and more time focused on building their business. Raising money online can be a good strategic decision!
Blurred Lines
It’s clear there are benefits to both types of fundraising — offline and online.
But what if there were a third way for a company to raise funds — a hybrid of the “traditional way” and the modern way? A hybrid that combines the benefits of a professional VC with the benefits of raising money online from the crowd.
Actually, this hybrid exists, and we’re expecting to see a lot more of it in the coming months and years.
You see, some companies start their fundraising efforts by following the traditional route. They get in the door of VC, pass the extensive due diligence process, and receive funds. But then they move their fundraising efforts online, raising additional money on one of the crowdfunding platforms.
Not only does this give the company the benefits of both the “old” and the “new,” but it also gives you — and other individual investors — the rare opportunity to piggy-back on some of the smartest investors out there.
Let’s look at an example.
Shyp Shape
AngelList featured a deal last week for a company called Shyp.
Ever have to ship something big or bulky? Maybe it’s been sitting around your house for weeks or even months because you don’t have the right box, or can’t make time to drag it to the post office or UPS. Shyp solves that proble
Basically, for a few bucks more than you’d pay if you did it yourself, someone will come to your door and then take the item away to be professionally packed, shipped, and delivered to its final destination. Interesting, no?
The deal size on AngelList was listed as $250,000. But that’s only part of the story. It turns out that the total deal size was $2.1 million.
Most of it, $1.35 million, came from “old-fashioned” offline sources: well-respected venture capitalists such as Sherpa Ventures. They did their due diligence and then wrote a check.
Another chunk of capital came in via one of Shyp’s angel investors, a celebrity author named Tim Ferriss. Tim put together $500,000 from people he knew.
But here’s where it gets really interesting:
The final $250,000 also had Tim’s fingerprints on it, but this time the money came from AngelList, one of the online platforms we cover here at Crowdability.
Within 53 minutes of Tim telling his 1.4 million blog readers about the opportunity, the entire $250,000 was pledged by AngelList users. The speed of the fundraise was impressive, and the press had a field day with it.
But to us, the most impressive part was that AngelList was offering everyday citizens the opportunity to invest alongside professional venture capitalists.
That is the beauty of equity crowdfunding.
Fuel-Efficient Hybrids
“Be a follower!”
That might sound familiar to regular readers of Crowdability. As we like to say: identifying the right deals to invest in is challenging — so when you have an opportunity to invest alongside a professional investor, you should explore it.
We’re very excited about the new twist on fundraising employed by Shyp, this hybrid of online/offline fundraising. We think it offers the best of all worlds to start-ups — and the best of all worlds to the investors who fund them!
If you’d like to keep an eye on the new investments being made by a handful of venture capitalists, you can start by clicking on the “View All Investors” link on Shyp’s Angel List page. (If you’re not already a member, you’ll need to register for free.)
Toward the bottom, you’ll see several VCs listed, including Sherpa Ventures and XG Ventures. Once you’re a registered member on Angel List, you’ll be able to “follow” these VCs, and you’ll be notified when they’re making a new investment.
Maybe you’ll be able to invest alongside them.
Now that’s a club I’d like to belong to!
Best Regards,
Founder
Crowdability.com
