The word crowdfunding is often used to refer to different types of private investment, from reward-based funding to equity and debt based funding. The one piece that remains constant in the use of the term crowdfunding is that it leverages the crowd—in other words, it opens up investment opportunity to those who do not typically invest in new ventures. For this reason, there’s a common misconception that crowdfunding is exclusively for the crowd. However, at FrontFundr, our optimal crowdfunding campaign leverages a combination of both the crowd and seasoned investors.
So what are the potential benefits of investment crowdfunding for investors and VCs? At Frontfundr, we vet companies and their funding plans before they can start their raise on the our platform. FrontFundr operates as a registered Exempt Market Dealer (EMD), so we must perform due diligence on companies before they can start their raise. By leveraging the platform's strict due diligence process, angels and VCs are able to reduce their efforts in identifying suitable investment opportunities, thereby lowering their transaction cost. With a lower transaction cost, an angel investor or VC is able to invest smaller amounts in earlier stage companies. This provides them the opportunity to build relationships early on in the start-up life cycle.
A VC firm can use investment crowdfunding to create a pipeline or watch list of prospective companies. Once those companies are ready for a larger Series Seed, Series A or B round, they will turn to their existing contacts and investors. VCs will gain deal flow not only from a lowered transaction cost, but also from building relationships with these earlier stage companies.
Angels and VCs also benefit from the crowd’s investment, as these new investors serve as brand champions; consumers turned investors who will champion the product to their networks. These investors, as members of the public, are likely to invest mostly in products or services that they understand or that they can see themselves using. Regular investors will essentially be an early test, providing market validation to the company’s concept. We see this in the donations and rewards crowdfunding space where people donate or ‘pre-order’ the product by pledging money.
Frontfundr has the potential to change the traditional configuration where consumers and investors are two entirely separate stakeholders of an early-stage company. A quality online crowdfunding platform not only opens doors to regular investors and brand champions, it also creates efficiency for accredited investors. By partnering with quality online investment platforms, VCs and angels will benefit from decreased transaction costs and an expanded pipeline of prospective companies. As demand for money by early-stage companies and supply from investors are aggregated, a new capital market will emerge, benefiting all participants.
At FrontFundr, we see the potential and importance of symbiosis between the established professional investors, such as angels and VCs, and new investors in early-stage companies with mutual benefits for all parties.