Assessing your options: angel investment vs. crowdfunding
Funding: a challenge that all but the very luckiest start-ups will have in common.
And with a wider range of options available than ever before, it can be difficult to work out which is best for your business.
Benjamin Kott, CEO & founder of IDEALondon alumni EnergyDeck, has grappled with a few different routes over the past years of running his start-up. Here he shares some of his experiences and top tips with the Start-up Hub.
For many people looking to get their business of the ground, friends and family will be the first port of call.
You can expect to raise perhaps £50,000 as a starter by going down this route, but it’s only so long before you’ll be running dry.
For us mere mortals who don’t have access to a family or (very good!) friends who can stump up £1m to bootstrap with, other options are a necessity.
Angel investors, particularly in London and the UK, are absolute life-savers. I’d say around 90% of the start-ups I know have worked with angels to reach their first valuation.
They can be vital to achieving the growth needed to reach either sustainability or a next round of funding.
One thing that has changed the game in the last few years is crowdfunding.
I was at a pitching event three or four years ago and people said that if you had to rely on crowdfunding then you were doomed. It meant your business model didn’t stack up, they said, or your idea wasn’t strong enough.
Today, you could conceivably complete an A round – which amounts to around £1-2m in the UK – on a crowdfunding platform.
Weighing up the benefits
In our case at EnergyDeck, we had completed a couple of angel investment rounds before considering crowdfunding.
It was at this stage that we really came to compare the benefits of the two approaches.
After raising those first two rounds, we were concerned that it had taken quite a long time to get everything in place once we had secured interested investors. This is because when you’re raising with angels, you decide on terms after the money has been offered.
By this stage in our development as a company, we were facing terms of investment we didn’t feel that we could agree to. Ultimately this delayed the process.
With crowdfunding, on the other hand, the terms are expressed up front. That was the major attraction for us.
In the event, we actually never ended up pursuing our crowdfunding campaign, despite a strong desire from Crowdcube to have us on board.
We had managed to secure a good chunk of our target funding from an angel investor network and considered that, as can often be the case in the start-up world, a bird in the hand might be worth two in the bush.
More than dumb money
Some people tend to view investment from angels or crowdfunding campaigns as ‘dumb money.’ That is, money that comes with no added benefits other than its inherent value.
I’d be inclined to disagree with this statement, particularly in the case of angels (crowdfunding indeed comes with fewer benefit in terms of forming partnerships with engaged investors, but it can bring other benefits such as publicity and an active audience).
There’s a chance we got lucky with our angels, but I would argue the majority of start-ups in the tech sector will have had a similar experience to EnergyDeck.
Angels investing in tech companies know that they need to understand not only the business idea and the wider sector as a whole, but also some of the technical aspects of the start-up’s innovation.
In my experience, it’s very difficult to convince an angel that your idea is going to work if they don’t have any understanding of these things.
Likewise, if I’m speaking with an angel and discover they don’t have any understanding of SaaS or energy or the built environment –key areas for EnergyDeck – then I’ll be less likely to continue pursuing their buy-in. So it goes both ways.
Too many cooks…
That said, you don’t want 30 angels all telling you what to do and pulling you different directions.
For this reason, the comparatively ‘silent’ investor pool offered by a crowdfunding campaign can be a benefit.
One other thing to consider with this option, however, is that crowdfunding is a very open, public-facing way of raising funds.
Start-ups will often be punching above their weight (or appearing to be larger than they are at least), and the transparency required for a successful crowdfunding campaign may put off potential large, blue-chip customers.
This isn’t a definite, of course, and it will differ from start-up to start-up. But it’s certainly something worth thinking about.
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