Business Angels or Crowdfunding? How About a Crowd of Angels?

We are increasingly consulted whether it would be better for start-ups to assemble financial resources through crowdfunding (e.g. Kickstarter) or through angel investors, and how to sequence each funding mode (i.e. what should come first). However, an alternative route is to combine both modes by attracting financing through a ‘crowd’ of angels, or ‘equity based crowdfunding’.

Crowdequity business angels and crowdfunding
Modified version of Crowfunding essence. Source: Wikipedia.

While rewards-based crowdfunding is already widely known about and understood, little is still known about equity based crowdfunding despite its rapid growth, particularly in the UK. According to a recent study by the UK BAA, 44% of business angels co-invest alongside crowdfunding platforms, indicating the strong growth of this type of financing.

As an example, consider the Spanish private location start-up, Wave, which last month completed a round of £800,000 from investors through the equity crowdfunding website, Crowdcube. Wave raised more than 500,000€ from angel investors just five months before. Later, those WAVE angel investors also took part on the Crowdcube round. WAVE’s example shows two important aspects: crowdequity is not only for startups in very early stages and, the boundaries between prototypical types of investors are blurring.

Before considering equity crowdfunding it is important to illustrate some of the issues associated with running such a campaign:

  1. Size of investment round and staged financing: For smaller rounds of financing, crowdequity can be an important vehicle for bridging the gap between VC funding. Ultimately, a staged approach can ensure retaining a higher level of ownership – VCs and angels tend to push entrepreneurs to accept more money than they currently need (at higher dilution). Ideally the start-up brings a strong lead investor (e.g. an angel) to the crowdequity round to leverage commitment and reputation. An important aspect, however, is to get commitment for follow-on investments (usually at higher amounts). There is some concern about the ability of equitycrowdfunders to participate in larger rounds.
  2. Signaling: Successful and well executed campaigns can send a very strong message to the market and give you attention among investors for later rounds. The marketplace is a central tool for promoting your campaign and it is visible to all registered users! At the same time, failed campaigns are visible to EVERYONE, while failed negotiations with angels and VCs are not. Some entrepreneurs fear that listing on the marketplace may affect their reputation as investors may think that startups list on the website only if they were unable to attract funding through other sources. Having a strong lead investor and the majority of funds of a round already committed help attenuate these concerns.
  3. Speed: Speeding up the deal through a platform. A good crowdequity fundraising process can take three months from the time you approach the platform until the deal is complete. Though a longer negotiation period during platform entry, or complications at any stage, might lengthen the process.
  4. Costs: Costs associated with the process include upfront expenses for signing-up to the platform, and success fees of around 4-5%. There is also an administration cost – managing the campaign requires marketing and communication with backers. It is unclear if such campaigns are actually less work intensive than having multiple pitches at the VC offices. However, the stringent requirements for listing on the marketplace (due diligence etc.) provided by the marketplaces is a thorough stress test for any entrepreneurial venture.
  5. Diversity of investors: Clearly crowdequity allows for the inclusion of a broad range of investors and may promote the start-up in another country. The campaign is standardized for everyone: each possible investor sees the same level of quality. Note, this has side-effects! While entrepreneurs can adjust their pitch towards the preferences of the investors offline, they cannot do so online.
  6. Legal burdens: You may plan to raise funds from a platform in another country. Crowdequity is regulated at a national level and, depending on the country, laws are applied very differently to companies, and also investors.
  7. Imitation concerns: You can protect your IP through pre-sales. If your product is not patent protectable and you fear being copied by larger and faster to market corporates, pre-sales can be used as a defensive tool.

Overall, these considerations reveal important issues when founders are contemplating pursuing funding from angels, VCs or crowdequity. In some cases, start-ups should consider crowdequity, as a combination of angel investing and crowdfunding, with all of its associated pros and cons.


Thomas Klueter, Assistant Professor of Entrepreneurship. Thomas holds a PhD in Managerial Science and Applied Economics from University of Pennsylvania, an MA from University of Pennsylvania and University College Dublin and a BA Science from Duale Hochschule Baden-Wuertemberg. Prior to pursuing an academic career, he was a financial analyst and project manager at IBM and JP Morgan. In those functions, he was involved in several worldwide projects in corporate finance and business development.

Thomas’ research interests lie at the intersection of strategic entrepreneurship and innovation. He focuses on how established and emerging firms manage technological change and the strategies firms pursue to develop and commercialize new technologies. His work has been been published in Academy of Management Journal (forthcoming), the European Management Review, and Academy of Management Best Paper Proceedings (2013,2014), and has been presented at several international conferences.

Amparo de San José, Director of IESE’s Business Angel and Family Office Network, is a researcher in the field of start‑up financing, venture
capital and entrepreneurship in developing countries. Her recently published work includes “Modelos de aceleradoras para emprendimiento social: Tres casos prácticos” [“Accelerator Models for Social Entrepreneurship: Three Practical Cases”] (at the publication stage), “El ciclo de private equity en Europa: Gestión y adquisición” [“The Private Equity Cycle in Europe: Management and Acquisition”] and public policy for the development of private investment.

She holds a bachelor’s degree in Business Administration from the University of Oviedo and an MA in European Public Policy from London South Bank University in the United Kingdom. Before joining the IESE Network, she worked for the Inter-American Development Bank, the Centre for European Policy Studies and the European Commission (DG Enterprise). She is a member of the Advisory Board of Xcala, the initiative to develop angel investment in Latin America.

One thought on “Business Angels or Crowdfunding? How About a Crowd of Angels?

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