Crowd-investment sites are never a company’s first choice for a funding round. Fundable, Republic, WeFunder, and their ilk, are a last resort for companies that cannot (or choose not to) bootstrap, and cannot raise money from VC funds or angels. At Healthie, we went through a pre-seed (via Techstars) and did a seed round, without once ever considering these types of platforms. We were the norm.
Why are these platforms a last resort?
1. Huge fees. These platforms don’t invest, and make their money off of fees. WeFunder, for example, charges companies 7.5% of their total fundraise. On a 1MM fundraise, that is 75K. As an investor, that diminishes your investment, since the company will receive less of it. As a company, it means you have to raise more money than needed (so more dilution) to accomplish your goals. 75k is the salary of an entire employee. What founder would ever sacrifice the extra dilution or extra person-power, if they could raise funds from a no-fee source? Other platforms charge a subscription fee (e.g Fundable charges companies $180/month), which means the platform is incentivized to have every company possible on their platform. A tiny fraction get funded. Most just pay the subscription fee, and end up with nothing to show for it. If you want new horror material for halloween, just search “COVID” on Fundable.
2. No help from investors. VC’s are often derided for promising “value-adds” that they don’t deliver. Some VC’s are decried as “dumb money.” These are real issues. Some VC’s over-promise and under deliver. Some have no clue what is going on. However, these ineffective investors are offset by truly helpful VCs and angels, and, in general, pale in comparison towards the systematic nothingness that crowd-investment sites provide. Fundable (and the individual investors in a Fundable round) will never do a bridge round for a company during tough times. They will never be a trusted confidante to bounce ideas and hard decisions off of. There’s a great saying “if you owe the bank 100 dollars, it’s your problem, if you owe the bank 100 million, it’s the bank’s problem.” When a seed-stage VC puts a million dollars in, they are heavily invested in your success. Outside of financials, not supporting a company would also take on great reputational risk for the VC. When a thousand people put in $1,000 each, no investor is accountable, and the bystander effect can easily lead to companies twisting in the wind.
3. No one cares. I don’t think raising a round should be celebrated the way it currently is. That said, there is definitely value for some companies in getting the wave of PR that comes from raising a round. TechCrunch articles spread awareness, legitimize newer businesses, and help with recruiting talent. Tech sites, like TechCrunch, don’t report on crowd-investment rounds. It is not due to the amounts raised, but due to the open secret of illegitimacy that fundraises on these sites have.
These three factors mean that you have adverse selection. Companies that can raise from better sources do, leaving only the runts of the litter to attempt to raise on crowd-investment platforms. Even if the company you invest in objectively is successful, you also have horror stories about these crowd-investment platforms going under (or getting acquired) and losing record of the investment.
Angel investing, as I mention in a prior essay, is also a bad financial decision, but has side benefits. Investing via crowd-investment platforms has worse financial returns (due to the adverse selection of companies), without any of the benefits. Furthermore, you have to trust not just the company you are investing in, but the crowd-investment platform itself.
Given all of this, it makes much more sense to treat these platforms like Kickstarter, versus an investment. I have no clue if Lloyd Armbrust’s American-manufactured masks are a good business. However, I respect what they are doing, and want to see it continue. Putting in $100 helps with that, and, much like a Kickstarter, comes with 50 free masks!
I expect the financial return to be zero. You should expect the same when investing through these platforms.