It wasn’t too long ago when equity crowdfunding (EC) was seen as a funding vehicle that had nothing going for it save for its novelty. Many supposed that it would eventually fizzle out once the hype around it died, and startups would come running back to VCs for funding. Back then, people were fearful about a lot of things like the lack of venture capitalist-support in CF campaigns, since they interfered with the VCs and their direct investments on startups.
It’s a different story today, however, and equity crowdfunding is considered to be just as mainstream as venture capitalist investments. But while the panic that accompanied it is long gone, some of the fears surrounding equity crowdfunding remain, due in part to prominent myths that fuel them today.
Here are 5 of them that possibly even you believe.
EC is for Companies with Unpopular Equity
One of the most pernicious, and unfortunately most persistent myths about equity crowdfunding out there is that it’s the last resort for companies that couldn’t raise money offline. The assumption is that companies that partner with EC platforms have failed under the scrutiny of venture capitalists – which means they are, for the lack of a better word, “garbage” startups – and are trying to raise money from people who don’t know any better.
This couldn’t be further from the truth. First of all, EC platforms are alternatives, not replacements, to traditional funding vehicles like VCs and angel investors. In fact, more and more venture capitalists see equity crowdfunding as just another channel to diversify their investments with. While it is true that equity crowdfunding platforms are a disruption to traditional VC investments, VCs themselves do not look down on EC and are actively seeking profitable investments there.
Only Unsophisticated Investors Go to Equity Crowdfunding
Another myth that can be traced back to the earliest days of crowdfunding. It just isn’t true, but there are significantly more inexperienced investors to be found on equity crowdfunding platforms. This is part and parcel of the structure of EC, which broadens investment opportunities by allowing small-time and non-accredited investors to invest in companies that are not listed on stock indices.
In that sense, it is true that a good amount of unsophisticated investors flock to EC platforms, but as mentioned earlier, venture capitalists are equally attracted to equity crowdfunding today, especially with the higher-than-average returns promised by startups on EC.
EC is Riskier than Direct Startup Investments
Most of the negative coverage of equity crowdfunding campaigns out there almost always focus on their inherent “riskiness,” sometimes highlighting the fact that they are startups that are not subject to venture capitalist scrutiny. In that sense, this myth is built upon the first myth listed above, which we have already addressed.
In reality, equity crowdfunded startups and VC-funded startups are subject to the same amount of risks. Investing in startups is risky, regardless of the funding vehicle, period. It does investors a disservice to arbitrarily hold up traditional venture capitalist investments over EC as if they are not subject to the same market forces that either build or bankrupt startups. It is true, however, that since startups see the convenience of lower overhead offered by equity crowdfunding platforms as feasible, more of them have been coming to EC to leverage their projects in recent years.
EC Precludes VC Participation
If it isn’t evident by now, much of the myth-fuelled fears surrounding equity crowdfunding revolves around VC participation. This myth is no different, and it is merely not true.
There is nothing on any securities laws in existence that disallows you to raise funding from venture capitalists directly on top of raising capital from the crowd. Technically speaking, EC is a different beast of a securities offering in that it won’t combine or interfere with your pursuit of other funding vehicles, so, yes, you can raise from VCs while doing equity crowdfunding. The only limitation you have to consider here is that you might not have the time to handle both at the same time, so make sure you exercise due caution!
EC Messes Up Your Cap Table
To be fair, this was true at one point. Typically, having a lot of individual investors means more competition should one of them wish to own more shares, which turns many of them off before they even invest. This is no longer the case, however, and it hasn’t been for the longest time.
Before Crowd Safe, careful structuring of you cap tables dealt with the problem efficiently, and so did creating special purpose vehicles, so companies had to deal with one entity, instead of thousands of individual investors. Now that Crowd Safe is a thing, however, you can raise from as many investors as possible and only ever deal with a single line item on your cap table.