When should your startup consider crowdfunding?

October 3, 2017

Achieving a series of successful fundraising rounds has become a key marker of startup success. A simple Google search will throw up multiple articles about the various funding rounds such as seed round and Series B round. Startups seek fundraising not only to acquire the capital to achieve their goals, but also to obtain resources to improve the quality of their product and/or service and compete with other businesses on the global stage.

Related reading: Angel investors vs venture capitalists

However, fundraising via the traditional method of courting venture capitalists isn’t for everyone. Venture capitalists typically desire a high return and will only invest in startups that offer sufficiently high returns commensurate to the level of risk associated with investing, and usually wield power in influencing business decisions. A startup might simply not be a good fit for VC investment for a number of reasons:

  • The startup lacks rapid, immense growth in the near future necessary for high returns;
  • You as a business owner are not willing to cede any control over how the business should be run;
  • If your startup is still in its infancy and has yet to establish a name for itself, it may be hard to convince VCs that you are the ‘unicorn’ they are looking for.

If the VC route isn’t for me right now, what other options do I have?

Other than grants, another popular method of raising funds from external parties is crowdfunding. Crowdfunding and VC funding are sometimes thought of as polar opposites. While VC funding consists of large amounts of funding from a small pool of sources, crowdfunding consists of small amounts of funding from a large pool of people. Online crowdfunding platforms allow people all over the world to make contributions to financially support numerous causes, ventures, and ideas.

Several top companies and products have managed to raise significant funds through these crowdfunding platforms. Virtual reality startup Oculus VR raised $2.4 million on crowdfunding platform Kickstarter for its Oculus Rift headset and was bought by Facebook a year and a half later for $2 billion. Similarly, the makers of the Pebble Time smartwatch managed to raise $20.3 million in Kickstarter crowdfunding, making it the most funded project ever on Kickstarter.

If you are were to advertise your product or service on a crowdfunding platform, you’ll find yourself in good company. However, it is important to first answer the question of whether crowdfunding is for you. Just because your startup isn’t suitable for VC funding doesn’t necessarily mean that crowdfunding should be your default strategy. Here we have compiled a list of pros and cons to help you decide whether or not crowdfunding is for you:

The pros of crowdfunding

1. Comparative ease of use and low barriers to entry

Registering on and advertising your product or service on a crowdfunding platform is marginally easier compared to organising and preparing for a meeting with VCs or applying for a grant or a loan. There are a range of reliable fundraising sites that are relatively straightforward to use.

Source: Kickstarter

Kickstarter, touted as the hottest crowdfunding site on the Internet, accepts all kinds of creative projects in a whole host of categories ranging from Art and Design to Technology. The application process involves registering for an account and filling out your project details, which will then be reviewed by Kickstarter staff. Kickstarter charges a small fee for every successful project, in addition to credit card processing fee.

Other crowdfunding platforms worth checking out include Indiegogo, which focuses on tech products, and GoFundMe, which focuses on causes and is great for social impact focused startups.

2. It’s an excellent marketing tool

Putting your product on a crowdfunding platform has the potential to provide you with far-reaching online exposure on a global scale. Crowdfunding platforms thus lend themselves well to viral marketing and can help you identify key opinion leaders that can lead to further opportunities to increase your online presence.

Source: Indiegogo

Seen in this light, crowdfunding is not just a means of fundraising, but is by itself also a platform for market research. You will be able to access data on how the market will react to your service or product before you take the plunge in investing the resources to produce it. The worst that could happen is that the campaign fails to reach its fundraising goal before the fundraiser expires and the money raised is returned to your backers.

3. Retain control over business decisions as a startup founder

Unlike fundraising via courting VCs, you don’t have to cede power or rights over how to run your business. Given that your potential pool of funders is so much larger, there is no expectation for you to cater to the whims of a backer that paid $50 to your campaign.

The cons of crowdfunding

1. Ease of access and low barriers to entry

That’s right, ease of access is a double-edged sword. The homework that all startups have to do when courting VCs – developing a coherent business plan, five-year forecasts, SWOT and Cost-Benefit analyses, and ROIs (all backed by solid numbers) – are not required when it comes to crowdfunding.

As such, many crowdfunding campaigns are launched by passionate people who lack both a million dollar idea and substantial business experience. If you forgo doing the homework that you would have done for a VC, you may find that you are way in over your head when you go about delivering on your promises to your backers. Many crowdfunding campaigns that raised their target goal have subsequently failed to deliver because they underestimated the cost and complexity of doing business and distributing a product or service.

Looking for tips on how to prepare and deliver an executive summary to potential investors? Download our free eBook Make Your Pitch:

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2. The marketing costs can add up

Marketing is a major factor in the success of a crowdfunding campaign. Backers of any crowdfunding campaign typically donate for the following reasons: the rewards that come with backing the project, an attractive and catchy product and service concept, and/or a mission statement that people can identify with. To be an attractive proposition to potential backers, you may have to invest in marketing efforts such as professionally produced videos and graphics to create a visually stimulating campaign. Adding on the fact that you have to set aside funds to deliver on your promised rewards to your funders, these marketing costs can certainly add up.

3. It only works if your product has mass appeal

 

Source: Oculus VR

While your idea may be worth a million dollars, it may not be a ‘sexy’ million dollar idea. Products like the Oculus Rift and the Pebble Watch successfully obtained funding because they are sexy ideas that captivated the attention of backers. If your product doesn’t captivate people in the same way, but still has the potential to realize high returns, it may be better for you to focus your energy on more traditional methods of fundraising.

Do you have any tips on how to go about a crowdfunding campaign?

Share with us in the comments below!

Angel investors vs venture capitalists

July 4, 2017

You’ve got your idea, your team and a plan all in place and all you need is the funds to execute. Securing funding is a challenging process for every entrepreneur. A startup founder has to look ahead into the future and consider all the various funding stages, as the different stakeholders – friends and family, angel investors, venture capitalists (VCs), early employees and more – that come on at each stage all have the power to influence the direction of the business.

Source: BusinessPlanTemplate.com

Some well-known startups such as version control repository and Internet hosting service GitHub and payment service provider Braintree bootstrapped for a long time before acquiring funding or being acquired. But let’s get real – most startups will require funding by external investors or the resources to keep it going will run out. Here, we give you the lowdown on two categories of potential investors – angel investors and VCs – and what you should consider when you are going through the funding rounds.

First off, an angel investor is a high net worth individual who invests his own money into companies. In contrast, an institutional venture capitalist (VC) is a professional firm that raises money by offering investors a chance to take part in a fund that is then used to buy shares in private companies, then invests in companies using money from that pooled capital fund.

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Stage of investment

Angel investors typically invest in deals at an earlier stage of the startup’s lifespan than VCs. That’s why the angel round comes before the VC round. The fact that VCs use other people’s money instead of their own naturally affects their risk appetite. Angel investors are comfortable investing at the seed stage when the startup has a prototype and is still building the product, while VCs typically only vest from Series A funding round onwards when the startup starts to demonstrate high growth potential.

Amounts invested

Given that angel investors typically invest at an earlier stage, they also tend to invest in smaller amounts. However, angel investors fund more companies than VCs do – in 2011, angel investors invested more than $22 billion in approximately 65,000 companies, whereas VCs invested about $28 billion in about 3,700 companies.

Involvement

While angel investors have equity in your business, they usually will not have a seat on your board. As such, they can be as hands-on or hands-off as you want. In contrast, VCs typically take a seat on your board and have a say in how your company is run. This is not necessarily a bad thing. Apart from the funding that private investors bring, many startups also tap on the guidance, expertise and network of their investors.

Timeframe

VCs’ decisions on whether to invest in a startup typically take a longer time than angel investors. As VCs are professional institutions, they tend to have a thorough due diligence process that they will undertake before making the decision on whether to invest. On the other hand, angel investors are investing their own money and have no obligation to third-party investors. They may not follow a defined due diligence checklist, which allows them to make decisions more quickly.

Motivations

According to a survey of corporate VCs, the most common motivations for investing in startups is to strategic alignment with relevant and emerging companies and financial return. And in traditional VC firms, it is no secret that the main motivation is return on investment as soon as possible.

Source: CB Insights

In contrast, angel investors are motivated by a greater range of reasons when investing in startups. While making a return on investment definitely factors into the decision-making process, angel investors may also be out to help less experienced businesses within their sector.

How do I get the attention of an angel investor or VC to fund my startup?

Now that you have a clearer picture of the type of investor you should seek for your startup, the next step is putting together a compelling executive summary for engaging potential investors. An executive summary should contain the following elements:

To facilitate private investors’ decision-making process and align with their motivations for investing, it is crucial that you do thorough research on your potential investors – whether angel investor or VC – and build an executive summary that will appeal to them. Even seemingly non-crucial elements such as a section on the founders and your team matter. According to a Harvard Business Review study, angel investors place great importance on the team and founders when deciding whether to invest in a startup.

Most importantly, it is essential to customise your pitch to your audience. When building your executive summary, make sure you consider whether your potential investor is appropriate for your current funding stage as well as the level of involvement they may have in your business when they come on board.

Want to know why these essential elements of an executive summary matter and how to think like an investor? Learn more in our free eBook “Make Your Pitch”:

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Working with Advisors

June 25, 2017

No matter how experienced you and your employees are, you cannot expect to have all the skills and knowledge your business needs, particularly as requirements change as your business grows. Growing businesses continually face new problems and opportunities. Advisors can be a good solution to get the advice your business needs. It is important to manage your relationships with them.

Non-executive directors are appointed using a Non-executive Director’s Letter of Appointment (LOA). Non-executive directors do not run the business day to day. They normally work only part time but provide expertise that deepens the experience of your business and can make you more attractive to investors.

It’s often mutually beneficial to compensate an advisor with shares in your company, and this can be agreed with a Founder Advisor Standard Template (FAST). This rewards the advisor with a small amount of equity if they reach certain targets. You could also reward a consultant through a Share Vesting Agreement.

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Other Documents you need when Raising Capital

Shareholders’ Agreement

Once the investor acquires equity and becomes a shareholder, this document will be required. It sets out the investors’ (shareholders’) rights and obligations. It also includes information on the regulation of the shareholders’ relationship and ownership of shares, and clauses relevant to the privileges and protection of the shareholder.

Resolution to Issue Shares

The directors of the company are required to approve the issue of new shares to the private investor. This will be recorded in a Resolution to Issue Shares.

Confidentiality Agreement

Your main business asset may be a unique idea, a formula, a technique, a process, an invention, or a novel business model. Any of these may be the reason why your business will succeed. Protecting this confidential information through a Confidentiality Agreement or Non-disclosure Agreement (NDA) will give you confidence to talk to investors while you reveal some of this highly confidential information.

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