Breaking down five common crowdfunding myths and misconceptions 

Modern crowdfunding dates back to 1997 when British rock band Marillion raised $60,000 to underwrite an entire tour of the U.S, an early-internet campaign that was so successful they used this method to fund the recording of studio albums again and again. 

At least in its earliest days, though, crowdfunding was viewed through a fairly narrow lens as an avenue for artists and creatives who were invariably rejected by traditional lenders, turning instead to their followers and fans to support them.

Fast forward to FY2022 when equity crowdfunding raked in $86 million in Australia alone. While many people still view angel or venture capital (VC) investment as a more attractive or lucrative option, securing VC funding can be extraordinarily time-consuming and complex. Also, most companies do not reach venture stage, or maybe they are operating in an industry that precludes them from qualifying for VC funding. This doesn’t mean they’re not good businesses or aren’t worth investing in, only that alternative funding options like crowdfunding are more viable.

For founders, crowdfunding streamlines the process and allows them to put their pitches in front of a much larger audience of motivated potential investors. Yet even though crowdfunding is often an extremely successful avenue to raising equity, myths and misconceptions persist. Let’s take a look at some of the most common ones.

Myth No 1 – Crowdfunding is only for small investments

Many founders still think of crowdfunding as a viable option to only raise small amounts.

However, currently it is increasingly common for companies to raise $2-3 million (and more) through crowd-sourced funding (CSF) platforms. Cannaponics, a Western-Australia-based medicinal cannabis company, recently raised $5 million from 2,750 investors in a fortnight through equity crowdsourced funding, an impressive 10x on its original minimum fundraising target.

Our current portfolio of potential investee companies are looking to raise anywhere between $1 million to $5 million in their first round and are expecting to reach significant value inflection points with the funds to be raised.

Myth No 2 – Crowdfunding is only suitable for early-stage companies

Crowdfunding isn’t just for startups! It can also be an attractive route to raising capital for established businesses getting ready for an initial public offering (IPO) on the Australian Stock Exchange (ASX). The IPO window is well and truly closed for smaller companies and it is not expected to open until mid 2025. In the interim, many businesses that have been planning an IPO may not suit VC investment, while could successfully fund themselves through equity crowdfunding until such time as the IPO window reopens. This is a specific sweet spot for Stride Equity as we are currently working with a number of companies that missed out on an IPO, but are getting ready in the next 18 to 24 months to list on the public markets.

Other opportunities that have been successfully funded through equity crowdfunding are property development syndicates and even those profitable businesses that seek capital for international expansion. 

Myth No 3 – Crowdfunding is a one-time funding solution

Crowdfunding does not necessarily need to be a one-off injection of capital.

Companies can raise multiple rounds through crowdfunding platforms and are legally entitled to raise up to $5 million in any 12 month period. Often these transpire as follow-on capital raisings that are executed at a higher valuation, providing investors with a clear indication of how the value of their investment is progressing.  In Birchal’s 2022 report on the crowdfunding sector follow-on CSF offers had on average a 140% increase in valuation. This confirms not only the ability to raise additional capital but also the quality of the companies participating in equity crowdfunding.

We, at Stride Equity, invest our funds together with the investors on the crowdfunding platform and are committed to the success of our companies. To that extent we are here to ensure that they are adequately funded and raise follow-on capital if and when needed, ensuring that they can execute on their business plan.

Myth No 4 – Crowdfunding provides companies only with dumb money

There’s often a misguided belief that VCs add more value to a business long-term. Many founders believe that crowdfunding is ‘dumb money’ because the funds are raised from individuals who don’t necessarily have vast investment experience or knowledge. 

In many instances this could not be further from the truth. A great example is Heliogen, the renewable energy business funded by the SeedInvest platform in the US in addition to major investors including Bill Gates. Heliogen went on to list on the Nasdaq and became one of the first crowdfunded unicorns. Whilst not all crowdfunding investors are the caliber of Bill Gates, many are highly successful business people or well informed professionals who do their research. 

Also, these investors often become customers of the crowdfunded companies, using and championing their technologies, products and services. This can add significant tailwind and facilitate the growth and success of companies that are looking for market expansion or scale up.

At Stride, we use our founders’ 100 years of collective experience of investing in and operating businesses to assist our platform companies, without the onerous VC investment terms.

Myth No 5 – Crowdfunding is a company’s ‘last resort’ for funding

Some founders think companies that raise or intend to raise capital through CSF are only doing so because they weren’t able to secure funding from angels or VCs. This might have been true in the past, but I’m seeing more founders making plans to raise capital through crowdfunding once they see the strategic value of it (customer acquisition, marketing/PR, capital, networks). Plus, there is a growing segment in the founder community that actually does not want to raise capital from VCs. 

In many cases, crowdfunding is likely the quicker option.  Depending on how well-prepared a company is, a CSF capital raise could take as little as 4-6 months, whereas raising capital from angels and VCs may take up to 24 months in the current environment.

VCs and crowdfunding needn’t be mutually exclusive options for companies seeking funding either. Some VCs, like Flying Fox ventures, support their portfolio companies when they have an equity crowdfunding campaign. Others only invest as part of a syndicated campaign including crowdfunding. This is how Stride works; we co-invest with retail investors in campaigns on the Stride Equity crowdfunding platform. 

Companies today have more options for funding than ever before and they should seriously consider equity crowdfunding in that mix. With obvious advantages and a generational shift in the way people invest in venture, equity crowdfunding is not only here to stay but here to grow.

Keep up to date with our stories on LinkedIn, Twitter, Facebook and Instagram.

>>> Read full article>>>
Copyright for syndicated content belongs to the linked Source : Dynamic Business – https://dynamicbusiness.com/leadership-2/expert/breaking-down-five-common-crowdfunding-myths-and-misconceptions.html