Venture Capital vs. Equity Crowdfunding, which is better for your Startup?
Founders have been conditioned to think that venture capital is the solution to fund their companies. While it seems to be an essential step to grow a business, it might not be.
I’ve long hesitated about whether or not to launch an equity crowdfunding campaign for ToroMatcha. In order to make a decision, I explored the pros and cons of running an equity crowdfunding campaign. Here is what my list of positives and drawbacks looked like:
EQUITY CROWDFUNDING
Pros
- Brand Ambassadors — Equity crowdfunding will help us build an army of investors, who will then become customers and brand ambassadors for ToroMatcha.
- Exposure — Equity crowdfunding will help us reach new audiences because the campaign will involve a lot of marketing initiatives.
- Better terms — Equity crowdfunding will allow us to have multiple investors instead of one big investor who wants to take control of the company.
Cons
- No guarantee — Nothing guarantees that we will meet our equity crowdfunding goal and have a successful round.
- Disclosures — Equity crowdfunding means that ToroMatcha’s data will be open to the public. We have to be transparent about all numbers, achievements and failures.
- Cost — The legal and marketing costs behind an equity crowdfunding campaign are very high. Which means that we’ll have to spend a lot of money on the campaign without knowing whether it will be successful or not.
VENTURE CAPITAL
Pros
- Big money — They have millions of dollars and can deploy large amounts of money very quickly.
- Approval — Startups that get capital from a reputable venture capital firm gain credibility.
- Network — Venture capitalists usually have more connections and resources.
Cons
- Low valuation — Venture capitalists will lower your valuation to increase their gain.
- Control — Venture capitalists want governance, preferred shares and anti-dilution terms. They almost want to gain control of the company, which can lead to the founders being kicked out from their company against their will.
Based on my analysis, I concluded that there is more positive than negative in launching an equity crowdfunding campaign for ToroMatcha. We are a consumer product, therefore the brand ambassador and the exposure aspects score a lot of points.
Plus, pitching to VCs takes a lot of time; which means that you need to stop working on your business in order to prepare and pitch your business in one-on-one sessions. When you’re a startup ran by a team of two, Laurent and I in this case, time management is critical. The success of ToroMatcha depends on how we manage our time scaling the company. We would rather pitch to the public than between 4 walls in order to bring more exposure to ToroMatcha while achieving our funding goal.
Misconception — You might have heard that VCs get scared of cap tables that have many investors. However, the truth is that equity crowdfunding investors sign a voting trust when they invest, meaning that their voting rights are assigned to the founder of the company, avoiding having too many small voices at the table.
If you haven’t already, check out ToroMatcha’s equity crowdfunding campaign on FrontFundr here: https://www.frontfundr.com/toromatcha and join the matcha fam!
