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The Advantages of Investment Crowdfunding for Diverse Founders and Social Entrepreneurs
Impact Crowdfunding Is a Strategic Source of Capital
Diverse founders and social entrepreneurs benefit from raising capital via investment crowdfunding in ways that they don’t via other capital sources.
Entrepreneurs and small business owners quickly learn to take money when it’s on offer. If a venture capitalist offers you money, you’d generally be wise to take it. If a bank is willing to give you a small business loan, take the cash!
As companies mature, they develop a reasonably complete “capital stack,” comprising a variety of equity and debt sources that optimize the cost of capital. It is an increasingly common view today—though not yet conventional wisdom—that having a layer of crowdfunding capital or two makes sense.
There are some clear and specific reasons I’m a big fan of using crowdfunding from the standpoint of a founder or entrepreneur. Here they are:
Investors Bring Value: Every private investor I’ve encountered over a decades-long career spent in finance brags about the value they bring in addition to the money, suggesting—often explicitly—that other people provide only money. The reality is that most investors can bring value in the form of connections to other capital sources, customers and their own buying power. If you sell a consumer good, chances are your big investors won’t consume more of your product than your small investors. Having 100 investors instead of ten gives you ten times the chance to extract this value from your investors.
Your Community Will Support You: Virtually everyone can count on raising some money via crowdfunding if they do the work required. You have to be willing to ask everyone you know to invest. Evidence shows that if you do this, you will raise money. That doesn’t mean you can be guaranteed $5 million, but you can likely raise $50,000 with little more than a business plan—if you do the work.
Diverse Founders Get More of Their Fair Share: Data is overwhelmingly clear that women and minorities fail to get their fair share of venture capital or small business loans. Crowdfunding starts with your network, meaning your family and friends are often the first to invest. Data shows that diverse founders are getting bigger chunks of crowdfunded capital than they are getting from banks or venture capitalists. While there is room for improvement in crowdfunding, it is doing better for diverse founders than other markets.
You’re In Control: If you seek venture capital, you can submit your pitch deck to 100 funds and not raise a dime. Some won’t even acknowledge receipt of your plan, much less give you a meeting. Less than 1 percent of companies successfully raise any venture capital. If you are lucky enough to raise venture capital, it will be on terms set by the investors. If you apply to banks, they unequivocally dictate the terms if they deign to lend you money (their apparent general rule being only to lend money to companies that don’t need it). With crowdfunding, you can set the terms. You can design a custom investment structure that fits your projections and plans and is as fair to you as an entrepreneur as it is to your investors.
If you are an entrepreneur who may wish to raise money in the future, you should learn more about crowdfunding. In addition to reading my newsletter, I invite you to attend SuperCrowd23 on May 10 and 11. Note that readers get a 50 percent discount!
This virtual conference will feature nearly 100 speakers. We’ll distribute at least ten $100 microgrants to enable randomly chosen participants to invest directly in one of the ten companies that pitch at the NC3 Impact Crowdfunding Live pitch sessions. Pitch applications are now open!
If you can’t attend the entire conference, you can purchase discounted one-day tickets for the day you can attend.