Crowdfunded startup survival more likely amid VC pullback
“Startups are dying amid a historic drought in venture funding,” began one recent Wall Street Journal article. “The pace of startup shutdowns, fire sales and sharp business-strategy changes is picking up,” began another. Yikes!
Higher interest rates, macroeconomic concerns, and unsettled geopolitical events have all contributed to a shaky environment for startups recently awash in cash. A startup “mass extinction event” is underway, as the head of one capital fund remarked. This is due partly to belt-tightening measures among venture capitalists. Startups seeking capital raised $37 billion the first quarter of this year, a 55% decline from last year. Indeed, according to Pitchbook, in 2022 the -7%, the return rate for venture capital firms was its lowest since 2009.
VC-backed startups are struggling
Anecdotes back the numbers. Once unicorn-potential startups with massive valuations are flatlining as market realities sink in. Hopin, an events startup once valued at $7.8 billion recently sold for a measly $15 million. Zume, a robot pizzamaker, once valued at $2.35 billion couldn’t turn pies into dough fast enough and is winding down. WeWork a hotshot of yesteryear whose valuation peaked at $47 billion is headed for a Theranos-style downfall. The list of lesser knowns failing to keep afloat grows daily.
Startup survival has always come with long odds. 7.5 out of 10 venture-backed startups fail. Only 16% went public or had a successful acquisition within seven years of getting their first VC check according to one study.
Crowdfunded startup survival more likely
But those that choose equity crowdfunding (Reg CF) over or in addition to the whales are more likely to survive. Unlike VC partners, Reg CF are more likely to be patient with startups trying to find their footing or pivot due to market conditions. By definition, they are casual, passive investors, investing disposable income. With lower stakes comes less pressure and more willingness to support a further round. Reg CF investors also tend to be more loyal as they are more likely to already be in the founder’s extended network and are often investing in part to support the founder personally. Further, for consumer-facing businesses they are more likely to already be customers or clients engendering further loyalty.
These factors matter when times get tough as they currently are in the present startup environment.
Crowdfunded startups add extra benefits beyond survival
Beyond surviving tough times, here are other reasons founders should consider a Reg CF round in place of or in addition to VC money:
- Broaden your investor base: Unlike other funding models, Reg CF can diversify your investor base from both a financial and geographical standpoint. Portals can accept investors from anywhere in the US, giving your business a potential foothold in all 50 states.
- Turn your customers into marketers: Reg CF allows your customers to become financially invested in your business and see their investment grow as your business grows. This provides a free marketing campaign for your business with every new investor.
- Incentivize your investors: Reg CF allows you to provide perks as part of the investment. Depending on the product this could include the product itself, ‘founder’ status on your website, access to events, or anything else that may induce an investment.
- Prove value to institutional investors: A successful Reg CF raise can show larger, institutional investors your business is ready for the big money. Many larger investors are now requiring “social proof” of a company’s business model. Your business can show larger investors value and momentum and provide your business “bridge money” while larger investors evaluate your model.
By Jossey PLLC
Schedule a free 30-minute consultation with my firm here: https://www.thecrowdfundinglawyers.com/cfl-scheduler/