As the alternative finance market matures, I am seeing more and more businesses that have raised capital through crowdfunding platforms struggling to fill their funding requirements in follow-on rounds. In the main, these are businesses that are starting to see market traction and are looking to raise capital to help them to scale up.
So why are they struggling? The answer appears to me to be twofold.
First, too many investors with too small a stake in the business means there is no supportive force driving the fundraise forward.
Second, many crowdfunded businesses are terrified of doing a down round given the publicity around their fundraises. The artificially high valuations we have seen companies achieve from the crowd simply don’t stand up to proper due diligence when more sophisticated investors are looking to get involved.
While there is no doubt that the crowd is a powerful tool for accessing finance, entrepreneurs planning to genuinely scale their business should not underestimate the power of having one or a number of supportive and experienced lead investors, with deep pockets, to re-invest in the multiple funding rounds that will be required. Be it an angel, family office or VC, these investors are able to leverage their expertise and/or network to give the business the best possible chance of success.
Simply using the crowd as a tool to achieve a short-term valuation boost without consideration of the longer-term funding needs of the business could in fact jeopardise the company’s ability to scale in the future.