CEO David White speaking at the Tech Hub debate on VC vs Crowdfunding
by their very nature, are innovative people. Hence, they are always looking for
a better way to achieve their goals. Funding your startup is always going to be
one of the biggest challenges you will face as entrepreneur, and in particular raising
money from Venture Capitals for an early stage company is tough. This
tension has seen the emergence of a new method of early stage funding called
Crowdfunding, last night I took part in a debate that questioned whether this
rise of Crowdfunding could complement or even replace the need for early stage
Whilst I believe that crowdfunding
has a place, I would argue that if you company is suitable, VC funding is still
the best route to building a high impact company.
Starting a tech company requires more capital than you might
think. There are technology costs, space requirements, personnel to hire and
you have to be aware that you will probably be operating at a significant loss
for at least the first year. The first 12 months is expensive, and it’s my
belief that if you are trying to build a high impact company, Crowdfunding
alone simply isn’t going to cut it.
If you look at high impact tech companies like Google, Apple, or
Amazon; they all had to raise in the millions before they were able to go
public. Google raised $25 million, Amazon $8 million, and even Apple had a
third round of funding where they raised $2.3 million, and that was in 1980!
“But those companies are old,” you may argue, “they come from a
time before Crowdfunding was even an option.” True, I may be showing my age
there. So let’s take a look at some younger ones: Twitter raised $1.16 billion;
Instagram, $57.5 million; Spotify, $188 million; and even Kickstarter needed
$10 million to get where it is today.
Conversely, if you look at the most successful tech campaigns on
Kickstarter, none have managed to raise more than $3 million, and the number
dips dramatically after that. The 5th most successful campaign only managed
$1.2 million. Sites like Kickstarter simply do not have the amount of capital
to invest that VC’s do. Sure you are pitching to a wider audience, but you’re
not hitting the right audience – the ones with the experience and connections
to get you what you need.
Lets be honest here, everyone who has started a tech company –
or any company for that matter – knows that your predictions are never 100%
accurate. Delays are inevitable, and no one can plan for all the pitfalls. And
with this extra time comes extra financing requirements, often more than a
young startup has on hand. Because of this, in purely Crowdfunded situations
where there is no established responsibility to bridge the gap, it is
frequently either brutally painful and time consuming or impossible to secure
the extra capital. Having a supportive VC partner can help keep the team
focused on execution by injecting enough capital to hit the key operating
milestones, which can generally be done quite quickly and painlessly as this is
something that VCs do every day.
The long and short of it is, no matter where you want to get
your initial seed funding from, eventually you are going to need VC funding to
take your company past the initial demo stage. And if you start by targeting
purely Crowdfunding sites you are losing out on an important learning
opportunity. Trust me, pitching to VC’s is not easy! The more practice you get
at it the better.
I’m not saying Crowdfunding doesn’t have its place or that you
should avoid it entirely, they can – in a best case scenario – provide you with
a financial comfort zone in which to develop your idea. But if you want my
advice, the most important thing you can do from an initial funding perspective
is invest your own money – and if you don’t have any, you’re friend’s and
family’s. This prepares you and the business for the reality of raising money
and this is a key discipline you need as an Entrepreneur.
And remember, there is life after funding, in many cases VC’s
can provide more than just a source of cash. Often investors will aim to be a
mentor and business partner, advising on strategy and development as well as
offer helpful ideas and discussion. This guidance is particularly important for
young startups who are often ignorant of business practices and strategies.
In conclusion, and as I argued last night, it comes down
suitability. Crowdfunding is a great, if what you need is that small amount of
capital to bring your idea to market and you don’t have access to a network
that is willing to fund it. However, if you have a business that is high impact
and meets the criteria of VC funding then take it. It will give you a host of
benefits outside the capital and will set you up on a time tested path that has
been trodden by the best tech companies in the world.
by David White, CEO