Founder Playbook: When & Why to Raise from Equity Crowdfunding Platforms

Democratization is a powerful tool.

We’ve seen democratization play out in various industries, with technology (almost) always playing a major role in enablement. In addition, the number of technology companies that have incorporated “democratization” into their mission statement as of late has been exponential.

Democratization of data
Democratization of information
Democratization of access
Democratization of energy
Democratization of finance
Democratization of investing > Democratization of alternative investing…

The democratization of alternative investments, in particular, has been a theme that we at Alpaca have paid close attention to for the last 3–4 years. In 2018 we published a Field Study on Real Estate Crowdfunding, and in 2020 we invested in MoneyMade, whose mission is to make alternative investing simple, fun, and approachable.

Quick History + Statistics:

The JOBS ACT regulation (specifically the adoption of equity crowdfunding on 10/30/2015) made it easier for retail/non-accredited investors to invest in private companies and helped democratize access to investments that historically were only available to accredited and institutional investors. The funding figures resulting from crowdfunding and other alternative investment democratization platforms are astonishing:

Crowdfunding platforms raised $34B globally in 2020 (source: Fundly)
Equity crowdfunding geared toward startups/small businesses raised $2.5B in 2020 (source: Fundly)
There were 6,455,080 worldwide crowdfunding campaigns last year (source: Fundera)
SeedInvest, one of the leading equity crowdfunding platforms, has funded over $400M into about 250 startups (source: SeedInvest)

The resulting wealth generation for angel investors over the last decade has been tremendous, and the rise of retail investors in alternatives is well documented (Forbes, January 2022). While many startup founders have taken advantage of this non-traditional funding outlet, the majority of entrepreneurs are still unsure of what is really involved and are not well educated around the benefits.

Crowdfunding 101 — The Basics:

Crowdfunding platforms provide entrepreneurs a streamlined structure, which offers consumers (both accredited + retail investors) the ability to invest small-dollar amounts and show up as one line item on the cap table. There are many forms of crowdfunding; however, for our purposes, we will focus on securities-based crowdfunding. The process works as follows:

Pitch/DD: Startup pitches their business to the crowdfunding platform investor rep, the same they would to any VC. Most crowdfunding platforms are structured similar to VCs in which they have an Investment Committee and require due diligence/conviction prior to approving a deal.
Campaign: Once a deal is approved, startups set up a “campaign” to raise capital from investors who have already been verified/vetted by the crowdfunding platform. The startup provides information such as...