16 Dec When it Comes to Crowdfunding, Your Funding Source Matters
With the SEC’s recent approval of equity crowdfunding, founders and entrepreneurs can now seek funding from non-accredited investors. In other words, there are more opportunities to raise thousands (and potentially millions) of dollars for a startup than ever before.
But just because you can widen your options for potential investors doesn’t mean you should.
In results from a study titled Attributes of Angel and Crowdfunded Investments as Determinants of VC Screening Decisions (Will Drover, Matthew S. Wood, Andrew Zacharakis, Nov. 2015), it appears that who founders get their seed money from has a tremendous impact on business growth down the line. Big-name angel investors and backers seem to positively influence later fundraises.
More options for funding, but think long-term
The results of this finding are pretty timely. Startup founders are likely to be excited to turn to local individuals for seed funding now that equity crowdfunding makes that possible. More options for funding means, potentially, more funding.
But when looking at growth long-term, the 11/2015 study suggest that holding out for better-known angel investors and backers can influence a company’s exposure and potential for increased funding.
Other factors do also impact the success of a startup’s fundraises, including the crowdfunding platform chosen. However, even in the most well-known platforms, the basic herd mentality exists, where investors gravitate towards other investors and companies whom they know and can trust.
On sites like Tilt and Kickstarter, that type of reputation is often signaled by the popularity of early sales. These well-known platforms feature a large number of companies looking to raise funds. One way investors can cut through the fat and find the opportunities worth pursuing is to look for campaigns that have had early success.
Be mindful of the decisions you make
As startups begin to turn toward alternative sources of funding during the early stage, whom they choose as backers can either open the door to later VCs, or keep that door shut permanently. While many founders are keen on raising seed money, landing a top-notch VC during a later stage is just as important (if not more) as a later-stage investment typically equates to bigger dollars.
Having access to a larger pool of investors is both exciting and opportunistic for startups. However, it’s easy to get caught up in the fervor and forget the importance of making sound, business decisions. Despite (or, perhaps, because of) the SECs approval of equity crowdfunding, startup founders must continue to be careful and selective with whom they seek funding from.