Startups Can Raise From Crowdfunding Sites And Get Their Venture Capital Too

When the SEC changed its crowdfunding regulations in 2020 to allow companies to raise up to $5 million — a big bump from the previous $1 million cap — more startups embraced the method to raise early-stage capital. The change also sparked a debate. While many founders championed the new crowdfunding regulations, saying the strategy allows them to set their own terms and have more control as the business gets off the ground, others in the industry argued that having the guidance of a venture capital firm from the beginning is critical. Almost two years later, many founders are realizing they can have the best of both worlds and raise rounds that include a sleeve for each, as originally reported in Midas Touch newsletter. 

For Atlanta-based fintech Qoins, the dual-raising strategy made a lot of sense because it nicely aligns with the company’s mission. The startup looks to help people improve their financial health by paying down debts through an extra automated monthly payment; Qoins has paid off  $20 million of debt thus far in its two-year history. Qoins founder, CEO and Forbes 30 Under 30 recipient Christian Zimmerman tells Forbes that the startup raised $2 million from institutional investors like Front Row Fund and Google for Startups Black Founders Fund, and realized that instead of pitching to more VCs, they could open the rest of the round to customers themselves. 

“Once you can start trying to achieve these [financial] goals and make these bigger purchases, how do you know your money is working for you?” Zimmerman says. “Why not let our customers and those that support our mission invest?” Qoins set up a campaign on the Republic crowdfunding platform with an investment minimum of $100, low enough to be an option for the majority of underlying users. Other companies have pitched the strategy as well, with the idea being customers can help the company build while also getting a cut if it succeeds. Bobbie, an infant formula startup dubbed its crowdfunding sleeve the “MotherLode” looking to tap their loyal parent following, and Nada, a Dallas-based home startup that helps people sell equity stakes in their home, have tried the strategy. 

The benefits stretch beyond strategy alignment, companies say. While letting customers get involved in the business has potential financial benefits, additional support can be found in areas such as product development and promotion, Ryan Feit, the CEO and cofounder of crowdfunding platform SeedInvest says. “The beautiful thing is that if you do an equity crowdfunding campaign, you not only raise capital but you also basically can market your product or service to hundreds of thousands of people and build an army of loyal brand followers,” Feit says. “They will be your best customers and will spend more money.”

Krishan Arora, the founder and CEO of the Arora Project, which curates and helps promote deals across crowdfunding sites like Republic and Wefunder, echoes this. Arora has become bullish on the dual-raising strategy, describing the trend as a natural progression for the crowdfunding space. He adds at the early-stages, these nonaccredited investors may provide better support than VCs could alone. “You get an army of beta testers, supporters, marketers which to me adds a lot more value than some guy sitting in an office telling you what to do versus 500 people testing your product and telling you what to fix,” Arora says. Essentially all VCs tout how much value they can add, but it isn’t always true, according to Arora. Sometimes just having capital or other resources could make more of a difference or for some save time on the sometimes lengthy fundraising process.  

For Nada CEO and cofounder John Green, raising the company’s seed round from both nonaccredited investors and VCs was a happy accident, Green says. When his startup set out to raise a round in 2020, his team wasn’t planning on pitching VCs because they felt it wasn’t the best use of their time. “Those are all independent conversations in a vacuum which by definition is inefficient,” Green tells Forbes. “We thought strategically, what is the most time effective way to do [fundraising] and have it be ongoing.” But when the startup posted its pitch deck on crowdfunding platform Republic, it received strong interest from VCs, too. Nada ended up with nearly 4,000 retail backers, multiple accredited angel investors and four VCs — two of which have since joined the startup’s board — all without taking any time away from the business to pitch. 

“The venture capital industry is a bit antiquated, it’s a bit of a challenging process especially if you are in the seed, Series A stage,” Green says. “The [fundraising] process doesn’t make a whole lot of sense. Everyone is asking for a pitch deck. ‘Can you create something in Powerpoint and a PDF’  as opposed to looking at a website.” Green says the company plans to raise a split round for its upcoming Series A too. 

Raising money in this way does involve the potential for additional problems that aren’t factors in a traditional raise, Florida Funders vice president of investor relations Saxon Baum tells Forbes. Florida Funders operates a similar strategy of making bets from its main fund while also pulling in accredited investors in a separate sleeve. While slightly different, Baum says many of the concerns are the same.  “You have to be careful about privacy,” Baum says about companies raising on public crowdfunding platforms. “You need to go through a pretty good disclaimer beforehand.” Evidently things can be downloaded off the platform and shared externally. “We haven’t run into that too much yet, but could foresee it happening.” Green agrees with this, saying that Nada was really cautious before posting their deck online because they knew once it was up there, it was really out of their hands. 

Lawyers like Jeremy Glaser, the co-chair of the venture capital and emerging companies practice at the Mintz firm, says he still wouldn’t recommend this strategy to his clients, because of the potential messiness of having so many investors. Feit of SeedInvest adds that some VC firms are hesitant to work with startups that raise from nonaccredited investors, which he says can be valid in some cases as not all crowdfunding platforms are created equal — due diligence can vary greatly. But, that may not be a problem for long. Arora says that he’s seen venture capitalists flood onto various crowdfunding platforms over the last year, with many sending scouts to look for opportunities to write early-stage checks. “Whether [VCs] like it or not this will erode a huge market share for early-stage rounds unless they adopt it,” Arora says.