Equity crowdfunding — or community raises, as the fundraising platforms involved prefer to call it — has grown steadily over the last few years. Regulations governing the process continue to evolve in the market’s favor, and 2022’s venture funding pullback may be the final piece needed to quiet the fundraising strategy’s naysayers for good.
This year looks poised to be monumental for equity crowdfunding, which entails raising capital through specific filings with the U.S. Securities and Exchange Commission, including Reg CF and Reg A, from a mix of investors that don’t have to be accredited.
Over the past few years, equity crowdfunding has shed much of the stigma that used to imply that only companies that weren’t good enough for VC raised this way. Some traditional VCs have even scouted on the platforms or encouraged their portfolio companies to pursue the process. But with the fundraising climate now showing cloudy skies, equity crowdfunding is getting ready for a field day.
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More than $215 million was invested in startups on equity crowdfunding platforms this year through the end of May, according to the Arora Project, a Republic-owned platform that curates crowdfunding initiatives and tracks data, up from around $200 million in the same period last year. Crowdfunding campaigns raised a total of $502 million in 2021.
While that isn’t too big of a leap, industry players are encouraged by the growth and see scope for more improvement later in the year, as crowdfunding typically sees an uptick around the fourth quarter.
“A few years ago, VCs wouldn’t care about or touch companies using crowdfunding, but that has changed now,” Nick Tommarello, the founder and CEO of crowdfunding platform Wefunder, said. “It’s hard to separate out how much of the growth is due to the increasing prestige of doing community rounds and how much is due to founders needing to extend their runway.”
Tommarello thinks there will be an increase in funded startups turning to the strategy this year as a way to avoid raising a down round in current market conditions. He said he just spoke with a “tier-1 VC” this week who advised their startup to raise on Wefunder to sustain themselves until next year.
Krishan Arora, the founder and CEO of Arora Project, also predicted a rise in users for the same reason in 2022, although he noted VCs have already been quietly doing this for years.
“As unfortunate as COVID-19 was to the larger venture economy, and as a recession is to the larger U.S. economy, it is almost forcing founders to look for alternative ways to raise capital,” Arora said. “It’s like they give [equity crowdfunding] a shot, and are like, ‘Why didn’t I do this to begin with?'”
Jeremy Barnett realized he had much more control over the round when he turned to Wefunder to fund Rad Intelligence, an AI-driven marketing startup he co-founded, in the midst of the brief funding pause in March 2020. He said he would have had less control if he raised directly from VCs, and he still ended up with a handful on his cap table.
As terms look set to get less founder-friendly and rounds take longer to close, many founders will have to grapple with how much control they have over their rounds this year.
“I like the idea of betting on myself, and venture capital at the time had completely dried up,” Barnett said. “The idea of this structured fundraise, where I controlled the start date, the end date and the value of a structured fundraise, is great. Compare that to when you do a seed round — you are always raising until someone writes you a check.”
Plus, while many industries are seeing investors check their pace, equity crowdfunding is not.
The average check on the various equity crowdfunding platforms is estimated to be less than $1,000. Tommarello said that on Wefunder, 80% of checks are less than $500.
“It’s not a life-changing amount of money for most people,” Arora said. “People are investing in startups they really believe in and businesses they fundamentally believe they want to back.”
While the ongoing pullback is giving equity crowdfunding a boost this year, Arora and Tommarello think it will continue to grow regardless of market conditions. Barnett said that he’s seen accelerators, including TechStars and Y Combinator, start to embrace the strategy, and Arora predicted more companies later in their life cycle will turn to the platforms.
“It’s almost synonymous to what happened to the adoption of the internet,” Arora said. “Once the internet came out, speeds only got faster and coverage areas got wider. It was a gradual progression. That’s what I think is happening with equity crowdfunding. It keeps gaining more and more market share.”