Is crowdfunding a good alternative to traditional seed round?
Sharing my office with Ulule kids for 14 months gave me a good overview of the crowdfunding topics, but I couldn’t get any solid answer about equity based crowdfunding even though the topic came in the conversation every once in a while.
In the traditional reward based crowdfunding, you back a project for a certain amount against a pre defined reward. If the crowdfunding campaign is successful, you get what you’ve been backing for. In many cases, reward based crowdfunding can be seen as a pre order campaign to finance the initial productions cost and ensure the new product meets its market.
Equity based crowdfunding is slightly different because instead of getting a product, you get shares in the company you invest in.
Let’s say you want to raise money but can’t or don’t want to go through the usual venture capital circuit. You decide to open 10% of your capital for 500.000€ at a 5.000.000€ euros valuation. You begin a crowdfunding operation, then, when it’s over and successful, you update your statuses to onboard your new shareholders. The most famous equity based crowdfunding is certainly Buffer’s that raised 3,500,000€ at a 60,000,000€ valuation.
Yesterday at LeWeb, I had the opportunity to meet both SoftTech VC’s Jeff Clavier who’s been investing in early stage startups and people from SmartAngels, a French crowd based investment fund. It was an interesting opportunity to learn more about both topic simultaneously.
Don’t look for SmartAngels English Web site, they don’t have one and there’s a legal reason for this. An English Web site may be considered a financial solicitation outside of France by the Autorité des marchés financiers (French SEC) which they don’t have an agreement for.
I wanted to know a bit more about SmartAngels process and key figures to understand how they differ from traditional seed round.
SmartAngels was created in 2012 and has funded 15 companies so far for about 7,000,000€. They’re growing rapidly with 50 applicants and 4 to 5 companies accepted each month. The average round is around 400,000€ with a 8,000 to 10,000€ ticket from both traditional seed funds and individuals.
The companies topics is extremely wide contrary to funds like SoftTech that de facto exclude some of them like photo sharing or anonymous messaging. What they focus on is very early stage disruptive companies and more established small businesses with an important traction. So far, SmartAngels has funded companies in green tech, electric cars, drones and health. Even though they mostly target B2C because it’s usually easier to get for individuals, they have good returns on B2B as well as it’s considered more serious.
A typical SmartAngel round starts with a 2 weeks study of the company and market to ensure it can fit the kind of things they want to invest to. Then, they have a 6 weeks pre collect they used to show the company to their partners, raise interest amongst the community of investors and discuss the operational parts and expected valuation. Once everything’s setup, they start the collect itself for another 6 weeks. This makes the total process last about 14 weeks.
These figures are hard to compare with SoftTech’s as the fund is already 10 years old with a yearly funnel of 750 companies applying and 15 funded only for an initial round of $850,000. There’s still one I’m interested in, which is the time it takes to get an answer. SmartAngels claim one of their key value is speed, but 14 weeks is long compared to the 2 to 4 weeks it takes to SoftTech to say yes (and even less to say no according to Jeff Clavier).
After talking with SmartAngels people, I was really sold to the concept if equity based crowdfunding, but a good night made me wake up upset about 2 important things.
The first one is the very low submitted / success rate considering they get 50 applications, accept 4 to 5 companies accepted each month and only 15 funded since 2012. I probably lack some figures, but it makes a success rate inferior than SoftTech’s 2%.
The other one if about crowd funded seed. Crowd funded and traditional seed look pretty much the same except for one thing. A VC friend of mine once told me you’re marrying your investors so you need to chose them carefully. With crowd funded seed, you don’t chose who you’re gonna marry, and from an enterprise point of view I wouldn’t feel secure. I don’t know how diluted SmartAngels funded companies are, but having too much unknown investors doesn’t seems a good idea at all.