Crowdfunding: Part of a coherent fundraising strategy? We think so.

As crowdfunding increasingly becomes the defacto way of giving and receiving capital, it’s a subject demanding more and more of your attention. Our startup economy has made the leap from asking, “What is crowdfunding?” to asking, “How can it be a part of a coherent fundraising strategy?” This is hardly an easy question to answer, and certainly no uniform approach can be prescribed to every company, but many of the same considerations that pertain to traditional fundraising remain most pertinent; timing and approach still matter immensely.

One of the most apparent effects of the proliferation of crowdfunding is the greater exposure startups and investors have to one another. With more options than ever before, startups now have the ability to receive funding in a variety of ways—the days of Silicon Valley holding the purse-strings are over. Or, as Y Combinator’s Aaron Harris describes it,”the progressive elimination of gatekeepers.” But more options means more choices, and choice is not without challenges.

Choosing Where to Raise Money

As always, the “right” approach to fundraising will vary from company to company and entrepreneur to entrepreneur. It’s important to consider all alternatives, however, keeping in mind that one may not operate at the exclusion of another. For example, it is entirely possible—and often very wise—to seek traditional venture capital money in conjunction with (or before, or after) other crowdfunding options.

As such, there is the question of timing: how does crowdfunding fit in early rounds? In follow-on rounds?

Rewards-based crowdfunding sites tend to be more appealing to hardware-based products which can solve the immediate needs of a wide number of consumers. Think Kickstarter and Indiegogo.

But equity-based crowdfunding platforms allow greater exposure to a broader swath of accredited investors, and like traditional venture capital, these investors can bring additional value: among other things, they can become productive board members, allow access to follow-on capital, and connect young companies to additional expertise, new hires, and potential partners.

The goal for each startup may be similar (the acquisition of both capital and wisdom) just as the goal for each investor might be the same (looking to give capital and wisdom to promising young companies in exchange for a piece of their future). What varies is the approach.

Working Together in Raising Capital

It’s difficult to offer broad advice as to when crowdfunding should fit in with a given fundraising strategy, but it’s important to realize that it doesn’t necessarily have to be an “either/or” decision. Whether you’re looking for early seed money or pursuing a follow-on round, here are three reasons to consider it at every point:

• Validation: Given the exposure to a much greater number of investors, it’s possible to use a crowdfunding platform as a way to gauge demand for your product. By tapping into a bigger network, there is a far greater chance of finding investors who resonate with you and your vision.
• Cap table simplicity: Every dollar you raise through an equity-based crowdfunding platform will be combined into a single investment. This allows it to be treated as though it had come from a more traditional venture capital firm; making things less confusing down the road for both founders and investors.
• Efficiency: The priority of every founder should be the growth and development of their company. At the ideal time, fundraising clearly plays a role in this, but time spent raising capital is time not spent growing your business. Wise allocation of your most valuable resource—time—might call for an efficient fundraising approach: presenting your ideas to a wide number of investors, and taking less time to do so.

There may be a simple rule of thumb here: if you are ready to raise offline, then it might be prudent to consider raising online as well—in early or later rounds. Let us know how we can help.