Where does VC meet Crowdfunding?
Crowdfunding is not a new concept but is one that has been brought into the glossy limelight by recent high-profile fundraises from the likes of Monzo, Revolut and BrewDog. Having personally enjoyed and learned a huge amount from equity crowdfunding as a hobby over the past four years, I decided to use my new perspective from the VC side of the table to dig deeper into its place in today’s broader investing landscape.
From relevance to values, this post explores the synergies, contrasts and gaps in venture capital and equity crowdfunding.
Crowdfunding as an Introduction to Venture Capital
Rewind to 2015 and while sitting in one of those university lectures (on favela fetishism) where you start to question the real-world applicability of your studies, I found myself on a website called Crowdcube.
Having always been a childhood fan of Dragons’ Den, suddenly seeing dozens of startups at the click of a mouse was as exciting as I had imagined crossing that silver screen would be.
I found myself on the pitch page of Camden Town Brewery, part of the now ubiquitous “craft beer” phenomenon. I watched their pitch video and was inspired by their vision to bring distinctive, tasty lager to people around the world through an engaged community.
From personal experience, I dreamed of a middle ground between a lukewarm Fosters and a niche ale. From a macro perspective, craft beer was growing 79% YoY and the market had all the feelings of cumbersome and insipid incumbents more interested in cash flow than innovation.
A few days’ of research later and the money I decided not to swap for unnecessary club drinks had been exchanged for shares. Less than a year later, I was drinking (a few) beers for free thanks to AB InBev’s acquisition.
While this is far from the level of detail and diligence required to invest in a company as a VC, from a personal perspective it was an ideal testing ground for a career as an investor. From an initial pitch screen to a more in-depth analysis of the financial forecasts and competitive landscape, the open crowdfunding model allows anyone to go into as much due diligence as suits them. Finally, and crucially, the open discussion boards allow real and visible engagement with founders, an accessible form of face-to-face for the armchair investor.
I will return to the personal influence crowdfunding has had on me, but first, let’s analyse and test crowdfunding pitted against venture capital.
Crowdfunding vs. VC
What can Crowdfunding do that VC cannot?
The blockbuster raises of challenger banks Monzo and Revolut have proven first-hand crowdfunding’s ideal candidates: community-driven B2C companies. Why?
- PR and Media Coverage. The key to press inches is relevance and public interest (besides the unavoidable rule of good contacts). By involving thousands of ordinary people, the newsworthiness of a startup being given a stack of money increases dramatically, not to mention free access to the highest conversion marketing tool in existence: word of mouth.
- Community. Genuine “corporate” communities are as rare as the unicorns they could help to build. Reaching a critical mass of engaged users is challenging, but made significantly easier when you bring on board thousands of financially and emotionally invested user-backers in one go. Monzo has proven the power of the community and used it to solve one of VC’s greatest problems: product-market fit. Monzo can build exactly the product its users want thanks to a broad and committed community.
- Loyal Users. Brand loyalty is increasingly as challenging as it is key to consumer success and it is hard to beat the power of a community with skin in the game. Monzo managed to reach a million users with next to no marketing spend because of the quality of their product, yes, but also because of the stickiness of their all-inclusive customer base, built on their crowdfunding community.
What can VC do that Crowdfunding cannot?
Venture capital can be quite an opaque industry, often poorly understood by people from founders to friends in the pub. Conversely to crowdfunding, VC headlines routinely start at the finishing line, rather than the starting gun. In today’s world of Lyft and Uber’s IPOs where early investors’ $9m become $6bn as if by magic, where does the VC-specific value-add come from?
- Mentorship and Strategic Guidance. While Monzo’s community-led approach to product is extremely effective, it is harder to envisage the same concept working efficiently or successfully for senior hiring, acquisition or international expansion plans, let alone strategic pivots or rebrands. They say “too many cooks spoil the broth” — there is true value in focused advice from a trusted adviser.
- Investing alongside Founders vs Armchair Dragons. The majority of crowdfunding investors will never directly engage with the founders they’ve backed other than at a fundraising meet-and-greet or an anniversary event. When investors are really needed is in moments of difficulty or of difficult decisions; that is when you need someone truly invested in the business, willing to get their hands dirty.
- Experience. A seasoned venture capitalist is likely to have seen tens of thousands of startups, assessed thousands and backed dozens. While a founder is (usually) likely to be the expert in their chosen domain, a VC is able to draw on trial and error comparisons across a range of sectors, stages and business models to streamline, perfect and support a startup’s growth story.
- Inside the fundraising club. VC remains, like much of the broader world of finance, a relatively small, club-like world and like most clubs, life is easier on the inside. Hopefully this barrier to entry can be broken down, but for now, VCs and their networks hold the strongest cards for follow-on investment.
Despite setting this up as a boxing-style showdown, the answer really is that crowdfunding and venture capital are synergistic, not competitive.
It is clear that a B2C, community-led startup can derive enormous value from adding a tranche of crowdfunding to their fundraising, but as an addition rather than a substitute. It is important to remember that while Monzo has been the most famous example of crowdfunding, it has represented less than 20% of their total funds raised; Passion Capital, Accel, General Catalyst and others have invested close to £200m.
Outside of this admittedly broad remit, I would argue that crowdfunding’s power is more limited. B2C businesses without the community element can still make use of point #1 above, while almost all community-driven startups are B2C regardless. However, the more niche and complex the sector and technology, the less relevant the power of the crowd becomes.
What can VC learn from the values of Crowdfunding?
Everyone is aware of the problems of diversity in VC, with alarmingly low statistics on the range of backgrounds of decision makers in the industry and of founders being backed. One key factor is the often exclusive, “club-like” nature of the industry where introductions must be “warm”.
The “hustling” and “network” logic behind this is slightly flawed. In many walks of life, those who know how to play the game best often have an advantage. However, in VC, we are all playing a game whose trump cards are “outlier”, “exceptional” and “unique”. Personally, I believe that those outliers, those unique people and ideas, are just as likely, if not more likely to come from somewhere unexpected as they are from your own statistically small circle.
Crowdfunding’s mission is to democratise investing. That is a good thing for the whole industry. Where better to innovate than the home of innovation.
By firstly embracing crowdfunding as a legitimate, synergistic co-investment ally, and secondly, by adopting its values of accessibility, inclusion and open-mindedness, VC stands to strengthen its claim to lie at the foundation of the economies of the future.
Crowdfunding as an Internship in VC
As I mentioned in my last post, crowdfunding formed a large part of my engagement and then interest in venture capital as an industry and career. Much like my modern languages degree at Cambridge and M&A analyst role at Bank of America, my crowdfunding experience gave me a foundation of technical skills, but more importantly, it taught me how to think.
Looking back now at the day I first browsed my way from favela fetishism to Camden Town Brewery, I am grateful that crowdfunding as a platform exists. It opened my mind to the world of early stage investing, with all its nuances and calculated risks, and lead me to my first role in VC.
For what it’s worth, my parting advice would be:
If you are a VC or founder, embrace crowdfunding, when it suits your company.
If you think you’re interested in VC, go build your own crowdfunding portfolio.