Crowdinvesting: bringing in a lot more than just new capital
17th Jan 2019
5 min read
It is an issue almost every startup must reckon with at some point or another: the need for growth capital. It might be when the startup enters the market; it might be when the company already has steady revenue and growing demand. In any case, there comes a point when a young company needs money to invest in product development and IT infrastructure, design new features, tap into marketing potential and, of course, pay the people who are working hard to do all that.
Many founders in this situation still start by trying to secure a loan from their bank. Although it is a decreasing trend, 12.2% of all startups surveyed for the Deutscher Startup Monitor 2018 relied on traditional bank financing. However, more and more young companies leave meetings with banks feeling discouraged: the restrictive attitude and red tape involved with taking out loans is disappointing for startup founders and hinders dynamic processes within the company. This is mostly due to lending institutions implementing regulations which are making loan-approval processes increasingly complex. How many young entrepreneurs have three years of balance sheets, a ten-year business plan, a comfortable amount of equity, personal guarantees and, in the best-case scenario, a good credit rating? It is particularly difficult for young companies to take out traditional bank loans in their first three years of existence.
Crowd-funded startups are more successful in the long term
In light of everything above, it should be no surprise that crowdinvesting is becoming more and more popular. Crowdinvesting platforms give young startups and private investors who want to invest in innovative business models the opportunity to meet online. On various platforms, investors can purchase virtual shares of the company with small sums of money, which helps them profit from regular interest payments and their stake in the company if it is successful.
However, the crowd is anything but a mere fall-back plan for companies that cannot secure bank financing: startups that decide on crowdfunding are not only raising equity-like funds that will make it easier for them to receive more funding in the future: they are also laying the foundation for their company’s success. A study by the ifo Institute on behalf of the German Ministry of Finance shows: crowdfunded companies are 21% more successful than other startups. They manage to fare significantly better during the particularly challenging first few years and to establish themselves better on the market in the long term. The crowd thus has concrete benefits that no bank and virtually no other financial institution can offer.
Crowdfunded companies are 21% more successful than other startups.
Beyond the returns – studies show that crowd investors have a genuine interest in “their” companies
Unlike a bank’s corporate account managers, crowd investors generally do not care about dry business plans. The crowd wants to feel inspired by exciting ideas and products – and by companies that exemplify and want to spread that inspiration. It is a key success factor that should not be underestimated. Crowd investors look at the company and its products from the outside. And this perspective often benefits entrepreneurs: they get feedback and new ideas early on, and can see what they need to improve. According to a survey taken by the crowdinvesting platform Seedmatch, 60% of all startups founded in 2017 optimized their products or strengthened their sales strategy due to feedback from their investors. In crowdinvesting campaigns, entrepreneurs have to appeal to a relatively broad audience, including potential customers – rather than just their bank’s account manager and his or her boss. In that way, crowdinvesting is a reconfirmation from the market.
What’s more, the crowd helps with networking. Crowd investors do not track the development of “their” company or product from a critical distance: they do so with goodwill, enthusiasm and even involvement. Some of them are very well connected, know the company’s industry and can open up doors for the startups with their business contacts who invest in startups. That is a huge advantage. Because, according to a study by the corporate finance data bank CB Insights, the startups that manage to develop a strong investor network tend to be the ones that have lasting success. Finally, crowdfunding campaigns attract attention – which boosts the public’s familiarity with, exposure to and image of the startup: an advertising impact that costs the company virtually nothing. And, for some companies, this impact is just as important to their future as the capital itself.
And so, crowdfunding campaigns are far more than just another financing tool. With committed investors, wide-ranging feedback, increased exposure and popularity and, finally, attractive business contacts and cooperation possibilities, crowdinvesting is a huge bonus for business development.