Deciphering Crowdfunding For Startups

This article is written by Carlos Espinal, Partner at Seedcamp and was originally published at TheDrawingBoard.

One of the options that founders are reminded of more and more above and beyond VC and Angel funding, is Crowdfunding via online platforms such as Kickstarter, AngelList, and Seedrs (to name a few). However, these platforms are not all the same and in this post we’ll cover how they differ as well as what makes them unique.

To help better categorise the use-cases for the different types of crowdfunding platforms, let’s split them into two:

Cash for Product Pre-Orders – Kickstarter, IndieGogo, etc.
Cash for Equity – AngelList (USA), Seedrs (UK), Crowdcube (UK), etc.

While we won’t delve too deeply into the first category, in summary, it is used primarily as a way to help fund the pre-order of tech product inventory, as usually other sources of cash are needed to make your company viable operationally; this doesn’t mean that this is the only way people use cash raised on these types of platforms, but it does help to at least highlight how it is used by them.

To highlight the above, let’s take a look at the Kickstarter Stats on their site (dated Oct, 2014) (https://www.kickstarter.com/help/stats) to help highlight some conclusions. With some number crunching, what you can see is an interesting set of conclusions:

The bulk of successful projects are raising around $1K to $10K on Kickstarter, with only a relative minority (2.2%) of successfully completed projects raising in excess of $100K.
Technology projects as a whole, no matter what the size, only represent 2.73% of the successfully completed projects on Kickstarter. The highest are music projects at 25% success rate, even if the amounts that are requested for those projects are smaller.
The highest success brackets for technology projects are ($20K – $100K) and ($1K – $10K) each at roughly 30% of the total Technology successes.
The success rate overall for technology projects raising $100K – $1M is a low 2.09%, even if as part of the overall Technology projects that have been funded, that bracket represents 20%.
Raising over $1m on Kickstarter for technology projects is just not really going to play in your favor with an overall success rater of less than 1%.

That said, the largest outlier and most well known tech Kickstarter fundraise was that of one of my favorite products, the Pebble Smartwatch with over $10m pledged. That said, they still raised capital from VCs and Angels. I’ll let you draw your own conclusions from that.

On the other hand, for the second category of crowd-funding platforms, those enabling investors to invest cash in exchange for equity you start seeing a different trend, one of fund-raising designed to help you build and scale your company rather than just to help you build a product.

On these platforms, however, rather than having your contributors provide cash in exchange for a promise or a pre-purchase of a product, your contributors are getting a share of your company. Literally, they are becoming investors and shareholders, with all the pros and cons that entails. What differentiates all the major platforms in this category are factors about how they structure the investment into your company and where they can operate.

AngelList, the dominant platform in the USA, for example, allows startups to raise two ways (in the word’s of AngelList’s Philipp Moehring):

“Offline fundraising” – This option is open to all companies and allows startups to use AngelList’s network and introduction features to connect with investors who might be interested in your company.

“Online fundraising” – AngelList Syndicates allow investors to invest in startups alongside an experienced Lead investor. The company can leverage the network, experience and reputation of Lead investor to raise funds for their business.

Fundraising on AngelList works better if the Startup’s profile is complete, the funding round has momentum, and the founder is responsive to answer intro requests and questions. Thousands of companies have raised funding in this way, or have augmented their existing round with additional investors they found on AngelList. The success rate is similar to what a company would experience offline.

Since the launch of Syndicates, however, more than 250 companies have raised money online through AngelList. The closest analogy for a founder is to think of a Syndicate as a one-time fund pulled together by the Syndicate Lead.

AngelList has closed about 90M through syndicates, and it is closing about a company per day now. They’ve had some european companies that raised from syndicates, including Patients Know Best (Elad Gil), Spatch (Andy McLoughlin), Holidog (Ed Roman), Enevo (Scott Banister).

Investment amounts

Since every syndicate is backed by different investors and is variably active, total investment amounts vary from syndicate-to-syndicate. Founders should work with with the lead investor to understand what they usually close. Across AngelList, syndicates have closed up to $1m, with most companies raising between $200K and $500K.

Lots of AngelList’s stats can be found online here.

Success rates

Companies that have a lead investor with an active syndicate have a more than 90% success rate from start to finalisation. After a deal is announced, investors can make reservations to invest, and closing is started after the allocation minimum is met. Once in closing, about 99% of all deals will be “finalized” and completed. The reason for these high numbers is the pre existing commitment of backers to invest in the lead’s syndicated investments.

Update Jan 24, 2015 – Added Crowdbnk data and streamlined numbers.

Now.. moving across the Atlantic… Let’s look at European crowdfunding platforms Seedrs, Crowdcube and Crowdbnk.

Jeff Lynn, founder of Seedrs, provides some statistics on his platform below:

Successfully Closed Round size distribution. <£100K: 63% £100K to £200K: 23% £200K to £500K: 11% >£500K: 6%

Average round size £160,000

% successful closing (number of deals that close as a percentage of total) 36%

Average time to round close on platform (eg. # of days) 29 days

Rounds closed sector distribution 80% tech 20% non-tech

Ayan Mitra from Crowdbnk also shares his numbers below

Successfully Closed Round size distribution 0-9,999: 15% 10,000-49,999: 10% 50,000-249,999: 20% 250,000-499,999: 30% 500,000-999,999: 15% 1,000,000-2,000,000: 10%

Average round size £537K

% successful closing (number of deals that close as a percentage of total) 42%

Average time to round close on platform 51 days

Rounds closed sector distribution Consumer Product: 5% Film, Art, Design: 10% Food & Beverages: 5% TMT: 60% Leisure, Retail, Services: 10% Other: 10%

Last but not least, Luke Lang from Crowdcube shares his platforms numbers below:

Successfully Closed Round size distribution < £100k: 23% £101-£200k: 39% £201-£300k: 16% £301-£500k: 11% £501k-£1m: 6% >£1m: 5%

Average round size £360K

% successful closing (number of deals that close as a percentage of total) 37%

Average time to round close on platform 32 days

Rounds closed sector distribution 54% tech 46% non-tech (i.e. food & drink, retail, manufacturing etc.)

Things to Consider

In general, when considering a platform, make sure you research various things:

How does the investment size fit with your needs?
How much you’d like to raise on a platform vs outside via an investor not on the platform (and how to intermingle the two within a reasonable time-frame to a close)?
What are the fees of going through the platform?
What have been the success rates for your time of company & product?
How do they structure the investment coming in to your company (lest you find yourself with a cap table that is laden with investors and a tricky governance structure? (However, there are many platforms out there that have solved this problem, but make sure to do your homework on that. )

In conclusion, crowdfunding as a way of either funding your product or your company’s growth is increasingly going to be a trend that will supplement, and in some cases entirely replace early stage investment capital from institutional sources such as VCs. For sure, at the very least you should consider building profiles on the relevant platforms for you.

Here are some additional resources for you on crowdfunding for your own research: