Online equity fundraising platforms--also known as equity crowdfunding platforms--are becoming increasingly popular, and growing in size. As a result, they are attracting more and more attention from anxious investment bankers, which in turn has led to rhetoric suggesting companies (and investors) stay clear. As the founder and CEO of CircleUp, a platform for equity investing in early-stage consumer companies, I routinely hear variations of the following arguments:
- "You'll get too many investors in your cap table."
- "People will see all your company's proprietary information."
- "People will see you are raising."
- "It's bad for your brand to be seeking funding online."
- "Only companies that can't raise offline raise online."
- Small investment bank to entrepreneur: "I already have connections to investors, so you don't need to use an online platform."
Let's unpack each.
1) "You'll get too many investors in your cap table."
I agree that having 75+ investors is not good for a young company. What an investment banker won't tell you is this: top equity funding platforms put the entrepreneur in control. Entrepreneurs decide both the minimum dollar amount per investor and the total number of investors in each round. I've seen our entrepreneurs close online rounds with just one investor; while others have wanted more investors to gain a larger network of passionate brand advocates to help grow their brand.
2) "People will see your company's proprietary information."
Most online platforms have private deal rooms which allow entrepreneurs to determine and approve which investors get access to sensitive information. And before they do so, entrepreneurs are given tools to assess a prospective investor's background, as well as the option to open a conversation with them before providing access to business financials and other sensitive information. Contrast the control you have in this model with a small investment bank creating a pitch book with all the business's data and financial models that is then sent out to a hundred investment firms--with no assurances of raising capital.
That decision--to flood the market with your Private Placement Memorandum ("PPM")--is a common one with small, and candidly desperate, investment banks. They care much less about your long term health, and much more about their own short-term revenue. Consequently, your company's PPM lands in the inboxes of hundreds, if not thousands, of investors. Most of whom are irrelevant; all of whom now have access to your company's sensitive financial and operational information. I've seen this one too many times.
There is no scenario in which there is zero risk of releasing sensitive business information. And that applies to any form of investment--serious investors demand to see all pertinent information. But to suggest this risk is greater online than with conventional financing is wrong.
3) "People will see you are raising."
What do Airbnb, Snapchat and Photobucket have in common? They've been in the news recently because they are raising capital. Similarly, Uber disclosed intentions last fall (and several times since) to raise more than $1 billion. These are public discussions--and I candidly don't understand why that hurts the company. It is common to see news reports about tech companies seeking capital. Strong, fast-growing companies with promising futures aren't afraid to let the world know they are raising capital. On the contrary: it's often seen as a sign of strength.
That said, leading online funding platforms allow businesses to guard information about a capital raise. (As mentioned above, the entrepreneur maintains complete control, deciding who can view confidential information and when.)
4) It's bad for your brand to be seeking funding online.
Here's where you have to differentiate between the different types of online funding platforms. Some are open and non-curated, where anyone can create a quick profile and seek capital. This leads to more noise than signal, and can in fact be a negative signal to the market. However, other platforms, are rigorously curated, accepting fewer than 5% of the funding applications they receive. Curated online platforms can connect your business with knowledgeable, well-established investors, and give your brand a stamp of approval.
5) "Only companies that can't raise offline raise online."
Here's where you have to differentiate between sectors. In the tech sector this is often true. Adverse selection is everywhere: Tech startups that have been passed over offline--where there is abundant available capital (in tech)--typically raise online only as an option of last resort. Consequently, the least promising deals go online; while the most promising raise from any one of hundreds of available tech VC firms or angel groups. In the consumer space, however, there isn't the same kind of early-stage capital infrastructure. Consequently, raising capital offline can be enormously inefficient and time consuming.
Historically, the average time to close a funding round online has been two to three months, compared to nine months or more offline. Just as shopping for books is easier, faster, and lower-cost on Amazon; online equity funding platforms are streamlining the funding process for early stage companies. Moreover, unlike offline intermediaries which often charge hefty retainers regardless of success, most online platforms don't make any money if the round is not completed.
6) "I already have connections to investors, so you don't need to use an online platform!"--Said every small investment bank ever
Online platforms actually help accelerate your raise by bringing top investors together with young high-growth companies in the sectors that those investors care about and understand. Platforms give entrepreneurs control over their fundraising and provide a centralized location for sharing information with thousands of investors across all geographies, seamlessly.
Many entrepreneurs are using online platforms from start to finish in the funding process because these platforms work as catalysts--where investors are engaged and actively seeking to invest in the space. Too often, I see offline investors dragging their feet on deals because they think they are the only game in town. By using an online platform to raise capital, entrepreneurs can close rounds faster, which enables them to get back to what's important--growing their business.