Is Crowdfunding the Answer to Democratizing Venture Capital?

By Silicon Allee | Investment

This article is published as part of Skytrain – a transatlantic investor community bridging the gap between investors and VC funds in the US and Berlin. Join the network or learn more about what we do here.

Getting a foot in the door of venture capital as a new investor used to be more challenging than beating Elon Musk in a controversial Tweet competition. Aside from the typical in-crowd bias in a community as close-knit as VC, there are good reasons why venture capital has traditionally been kept away from the consumer investment market. Investing in startups is high-risk and definitely not for the faint-hearted so a lot of governments (on both sides of the Atlantic) made the regulations for taking VC to the consumer market very tight indeed.

Thankfully, things have changed somewhat (since 2016 in the US and more recently in the EU) and there are some visionary companies taking advantage and making “venture-as-a-service” a reality – closing the door on VIP venture capitalism and enabling everyday people to get in on the action and do their part in helping founders bring their business dreams to life.

There are a few notable players in the Syndicate/SVP market (as we covered in this article) but we decided to take a deeper look at crowdfunding platforms that focus on equity investing. We secured an interview with Katie Powers – head of EU operations at Wefunder. Wefunder is currently the largest equity crowdfunding platform in the US so we’re going to start there and use them as a baseline.

Wefunder popped onto the scene in 2016, in response to changes in US law allowing everyday people to invest as little as $100 in startups and small businesses. Since then, they’ve raised just over half a billion USD for around 2000 companies – and amassed a network of 1.5 million users with around half a million actively investing. 

On their site, you’ll be more likely to find the term ”community rounds” than crowdfunding or crowd-investing. And we agree that it does a much better job of summing up the role that Wefunder and other venture-as-a-service providers fill in the startup funding process.

As we’re writing this for the Skytrain Network, helping US investors connect with funds and startups here in Berlin, our first question was a pretty obvious one:

Can US investors use venture-as-a-service platforms to invest into the EU?

As we’re writing this, Wefunder only operates in the US but is currently launching in the EU and expected to be live by early 2023. The reason for that move into the European market was the European Crowdfunding Regulation. Sweeping legislative changes in the EU harmonizing the regime around equity crowdfunding across the entirety of the EU. In the past it was siloed, with each country being responsible for implementing their own laws in line with a basic EU directive. The new regulation is a passport regulation so as long as they’re working with an accredited platform, a company can raise from investors across the entire EU governed by one set of laws. 

From a legal perspective it looks very hopeful that the EU can pick up where the US left off after years of reform. So equity crowdfunding has the potential to make a big splash in the European venture capital ecosystem. The goal at Wefunder is to have one harmonized platform so investors in the US can tap into European deals and vice versa. 

Pretty crowded…

What are the benefits of “community rounds” as opposed to regular VC investing as an angel or LP in a VC fund?

Benefits for founders:

Using a crowdfunding platform helps startups not only in raising capital, but also in marketing their company. The companies that tend to do best on crowdfunding platforms already have some kind of community; fans, customers, users, etc. They then utilize those people as initial investors for as little as €100. The sheer volume of their community helps them gain momentum then they’re exposed to the user base of investors. 

Even though it’s quite rare to see large angel investments through equity crowdfunding platforms, you’re getting a large volume of smaller investors and potential customers who’ve bought into your company – literally. So then you’ll see the network effect as they become brand ambassadors – making intros and telling people about you. 

Benefits for investors:

As every deal on Wefunder (and most other equity crowdfunding platforms) has a seasoned lead investor behind it, you can read their explanations as to why they’re backing the deal. That’s especially beneficial for early investors because they can follow the wisdom of lead investors and learn about how to evaluate VC deals with a very low financial commitment.

We would add here that equity crowdfunding platforms also allow more seasoned investors to dabble in new sectors where they don’t have a lot of experience. And it’s a very easy way to build an expansive portfolio and spread the risk over multiple investments. A lot of these platforms now have a secondary marketplace where users can trade equity shares outside of regular funding rounds. So, if there’s a startup you like and the funding round has closed, there’s a chance you can pick up a piece of the pie there.

How is equity crowdfunding different from rolling funds on AngelList or Syndicate & SVP platforms?

Equity crowdfunding allows for unaccredited investors, whereas most other forms of venture-as-a service aren’t tailored towards commercial investors. 

There’s also a much lower buy-in cost than most other options and it’s much more accessible for all types of people – from absolute beginners to people with more experience of investing who want to find an easy way into venture capital.

What’s the actual investment vehicle?

All investors are rolled up into one line on the cap table. That’s done through an SPV in the US and a nominee in the EU. This simplifies the process for everyone involved. The company doesn’t have to go and collect hundreds of signatures, they only need one from the lead investor who signs off on that vehicle.

What’s the typical size of funding rounds?

Startups can raise between $50,000 and $5M per year. The average deal size right now on Wefunder is $500,000. 

Wefunder most often works with companies who are pre-series A and need a bridge round. Either that or they’ll tack this community round on the tail end of a traditional equity round. So a series A or series B will open up a separate round for their community after raising from VCs – and that’s a cool opportunity for everyday average investors to get into these rounds on the same terms as the VCs.

What are the typical fees and carry for investments?

On the founder side, Wefunder charges a “success fee”. It’s 7.5% of the total amount the company raises on the platform when the round is successful. 

For investors, there’s a payment processing fee. That’s 2% of the investment if you pay via bank transfer or wire transfer and 3.5% if you pay via credit card. But regardless of investment size, it’s capped at €100. Wefunder also charges 10% carry on the total vehicle, so if the SPV raises €5M and the investment is profitable, they would take 10% of any profit the investment makes and the rest is distributed among investors.

What’s the minimum and maximum investment?

The minimum is $100 or €100.

For accredited investors (who make more than $200,000 a year or have $1M in assets) there’s no maximum investment amount. At WeFunder they’ve had some investments come through upwards of $1M. Generally though, the maximum amount is a percentage of your income and net worth. You’d input that information into their system and get a calculation of your maximum permitted investment based on that.

How would a US investor get started investing into the EU through equity crowdfunding?

First off the disclaimer: you should never invest more than you can afford to lose –  Wefunder and every other investment platform plaster it everywhere on their site. We’re also not investment advisors so you’re 100% responsible for your own research and due diligence before investing anything into venture capital.

The first steps are all laid out on the Wefunder site, so sign up and take a look at the ‘explore page’ – you’ll see all the current deals listed (EU deals will be coming soon). The deals are categorized by a lot of different factors:

Venture Backed – Startups already backed by VC funds

Notable Angel – Startups already backed by a well-known angel investor

Y Combinator – These startups are all Y Combinator alumni. Y Combinator is the most successful silicon valley accelerator in the world.

Minority Founder – Obvious

Female Founder – Also obvious

PBC & B Corp – These startups have relevant Public Benefit certification (basically an independent seal of approval for companies that hold themselves accountable to their workers, the environment and their community)

Industry Sector – (multiple categories from tourism to mobility, fintech, greentech and energy)

Get to know the space you’re investing in by starting with smaller amounts in varied industries – don’t put all your eggs in one basket.

Get yourself a tax advisor who’s familiar with cross-border taxation & investing.

In terms of documentation, there’s not many restrictions. There are some geographic restrictions; some regions of Canada and countries classified as “high risk” by the EU. Further than that it depends on how much you want to invest. Anyone can invest up to $2,200 a year with only their name, email, tax ID, and address. If you’re investing more than that, the platform will have to run a Know Your Customer (KYC) background check. For anything above $20,000, they need to ensure you’re an accredited investor. When investing funds into the EU, you’ll also need to take a short investor quiz. The quiz covers the basics of equity investing and best practices.

You can find a range of case-studies from previous WeFunder startups here.

What other equity-based crowdfunding platforms are out there?

The list is growing at hyper speed as crowdfunding gains in popularity as a low-barrier of entry into venture capital investing. 

But here’s a short list of some other major European players.

Seedrs – This platform is UK-based with European branches in Berlin, Lisbon and Amsterdam. The platform does have international deal flow but as we’re writing this the majority of portfolio companies are also UK-based.

The main deals on Seedr are divided into two categories; ‘launching soon’ and ‘raising now’. 

They also have a ‘private deal room’ exclusively for High Net Worth and Sophisticated investors.

An interesting thing about Seedrs is their secondary marketplace. Essentially, investors can sell shares in Seedrs funded companies. So it’s possible to increase your share in a company, invest outside of a regular funding round, and turn investments into quick returns.

Companisto – The Berlin-based equity crowdfunding platform have been in the game since 2012. Their Investment Club offers a minimum investment of €250 into primarily German startups.

Companisto also has a members only Angel Club with investments starting at €250,000 and, similar to Seedrs, they also have a secondary marketplace to buy and sell shares in the platform’s startups.

Crowdcube – Another UK-based platform that offers equity crowdfunding investments into European startups. Having entered the scene in 2011, this makes Crowdcube one of the oldest equity crowdfunding platforms in Europe. 

An interesting feature of Crowdcube is their Cubex platform (currently in beta). Cubex gives investors and shareholders the opportunity to discover, research and express an interest to buy or sell shares in their favorite private European companies. If enough interest is registered in a given business, Crowdcube will seek to facilitate a transaction and you will be notified when a sale goes live.

Seedmatch (DE) – the first platform for equity-based crowdfunding in Germany has been up and running for over a decade. Investments start at €250 and private individuals can invest up to €25,000 per startup. Investments above €1000 will require a  self-disclosure.

The selection procedure for startups is pretty robust. They only accept companies from the DACH region (Germany, Switzerland, Austria), looking for 300K and above for growth.

In terms of credentials, Seedmatch currently has over 78,000 users who have already invested more than €70.5 million in German startups.

Invesdor – a crowdfunding platform based in Helsinki, Vienna and Berlin who offer both fixed interest and equity investments. 

An interesting thing about Invesdor is that they give businesses full discretion over how they raise money, including deciding who can see their investment requirements and who should be able to invest. Each raise is broken into three rounds and offers startups case evaluations and pitching to Invesdor partners before the round goes live. 

According to their website they currently have more than 124,000 users who have invested over €320 million in European startups in more than 515 financing rounds.

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Skytrain is funded by the European Regional Development Fund (ERDF) in collaboration with the Berlin Senate Department for Economics, Energy and Public Enterprises

Dieses Vorhaben wurde als Teil der Reaktion der Union auf die Covid-19-Pandemie finanziert.