{"id":425,"date":"2016-11-22T12:43:19","date_gmt":"2016-11-22T11:43:19","guid":{"rendered":"https:\/\/blog.iese.edu\/entrepreneurship\/?p=425"},"modified":"2016-11-26T02:36:47","modified_gmt":"2016-11-26T01:36:47","slug":"business-angels-or-crowdfunding-how-about-a-crowd-of-angels","status":"publish","type":"post","link":"https:\/\/blog.iese.edu\/entrepreneurship\/2016\/11\/22\/business-angels-or-crowdfunding-how-about-a-crowd-of-angels\/","title":{"rendered":"Business Angels or Crowdfunding? How About a Crowd of Angels?"},"content":{"rendered":"<p style=\"text-align: left;\">We are increasingly consulted <strong>whether it would be better for start-ups to assemble financial resources through crowdfunding<\/strong> (e.g. Kickstarter) <strong>or through angel investors<\/strong>, and how to sequence each funding mode (i.e. what should come first). However, <strong>an alternative route is to combine both modes by attracting financing <\/strong>through a &#8216;crowd&#8217; of angels, or &#8216;equity based crowdfunding&#8217;.<\/p>\n<figure id=\"attachment_430\" aria-describedby=\"caption-attachment-430\" style=\"width: 744px\" class=\"wp-caption aligncenter\"><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-430 size-full\" src=\"https:\/\/blog.iese.edu\/entrepreneurship\/files\/2016\/11\/Crowdequity-busines-angels-and-crowdfunding.jpg\" alt=\"Crowdequity business angels and crowdfunding\" width=\"744\" height=\"511\" srcset=\"https:\/\/blog.iese.edu\/entrepreneurship\/files\/2016\/11\/Crowdequity-busines-angels-and-crowdfunding.jpg 744w, https:\/\/blog.iese.edu\/entrepreneurship\/files\/2016\/11\/Crowdequity-busines-angels-and-crowdfunding-300x206.jpg 300w, https:\/\/blog.iese.edu\/entrepreneurship\/files\/2016\/11\/Crowdequity-busines-angels-and-crowdfunding-500x343.jpg 500w\" sizes=\"auto, (max-width: 744px) 100vw, 744px\" \/><figcaption id=\"caption-attachment-430\" class=\"wp-caption-text\">Modified version of Crowfunding essence. Source: Wikipedia.<\/figcaption><\/figure>\n<p>While rewards-based crowdfunding is already widely known about and understood, <strong>little is still known about equity based crowdfunding<\/strong> despite its rapid growth, particularly in the UK. <strong>According to a recent <a href=\"http:\/\/www.enterpriseresearch.ac.uk\/wp-content\/uploads\/2015\/01\/ERC-Angels-Report.pdf\" target=\"_blank\">study<\/a> by the UK BAA, 44%\u00a0of business angels co-invest alongside crowdfunding platforms<\/strong>, indicating the strong growth of this type of financing.<\/p>\n<p>As an example, consider the Spanish private location start-up, <strong>Wave<\/strong>, which <strong>last month <a href=\"https:\/\/www.crowdcube.com\/companies\/wave-1\/pitches\/lRrkPl\" target=\"_blank\">completed a round of \u00a3800,000<\/a> from investors through the equity crowdfunding website<\/strong>, <strong>Crowdcube<\/strong>. Wave raised more than <strong>500,000\u20ac from angel investors just five months before<\/strong>. Later, those WAVE angel investors also took part on the Crowdcube round. WAVE\u2019s example shows two important aspects:\u00a0<strong>crowdequity\u00a0is not only for startups in very early stages<\/strong> and, <strong>the boundaries between prototypical types of investors are blurring<\/strong>.<\/p>\n<div class=\"su-vimeo su-u-responsive-media-yes\"><iframe loading=\"lazy\" width=\"740\" height=\"400\" src=\"\/\/player.vimeo.com\/video\/176633349?title=0&amp;byline=0&amp;portrait=0&amp;color=ffffff&amp;autoplay=0&amp;dnt=0&amp;muted=0&amp;texttrack=\" frameborder=\"0\" allow=\"autoplay; fullscreen\" allowfullscreen title=\"\"><\/iframe><\/div>\n<p>Before considering equity crowdfunding <strong>it is important to illustrate some of the issues associated with running such a campaign<\/strong>:<\/p>\n<ol>\n<li><span style=\"color: #b10e10;\"><strong>Size of investment round and staged financing<\/strong><\/span>: 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 &#8211; 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 <strong>get commitment for follow-on investments<\/strong> (usually at higher amounts). There is some concern about the ability of equitycrowdfunders to participate in larger rounds.<\/li>\n<li><span style=\"color: #b10e10;\"><strong>Signaling<\/strong><\/span>: Successful and well executed campaigns can send a very strong message to the market and give you attention among investors for later rounds. The <strong>marketplace is a central tool for promoting your campaign<\/strong> and it is visible to all registered users! At the same time, <strong>failed campaigns are visible to EVERYONE, while failed negotiations with angels and VCs are not<\/strong>. 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. <strong>Having a strong lead investor and the majority of funds of a round already committed help attenuate these concerns<\/strong>.<\/li>\n<li><span style=\"color: #b10e10;\"><strong>Speed<\/strong><\/span>: Speeding up the deal through a platform. <strong>A good crowdequity fundraising process can take three months<\/strong> 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.<\/li>\n<li><span style=\"color: #b10e10;\"><strong>Costs<\/strong><\/span>: 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 &#8211; 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.<\/li>\n<li><span style=\"color: #b10e10;\"><strong>Diversity of <span style=\"color: #b10e10;\">investors<\/span><\/strong><\/span>: Clearly crowdequity allows for the inclusion of <strong>a broad range of investors and may promote the start-up in another country<\/strong>. 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.<\/li>\n<li><span style=\"color: #b10e10;\"><strong>Legal burdens<\/strong><\/span>: You may plan to raise funds from a platform in another country. <strong>Crowdequity is regulated at a national level<\/strong> and, depending on the country, laws are applied very differently to companies, and also investors.<\/li>\n<li><span style=\"color: #b10e10;\"><strong>Imitation concerns<\/strong><\/span>: 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.<\/li>\n<\/ol>\n<p>Overall, these considerations reveal important issues when founders are contemplating pursuing funding from angels, VCs or crowdequity. In some cases, <strong>start-ups should consider crowdequity, as a combination of angel investing and crowdfunding<\/strong>, with all of its associated pros and cons.<\/p>\n<hr \/>\n<p><strong>Authors:<\/strong><\/p>\n<p><span style=\"color: #b10e10;\"><strong>Thomas Klueter<\/strong><\/span>, Assistant Professor of Entrepreneurship.\u00a0Thomas 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.<\/p>\n<p>Thomas&#8217; 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.<\/p>\n<p><strong><span style=\"color: #b10e10;\">Amparo de San Jos\u00e9<\/span><\/strong>, Director of IESE\u2019s <a href=\"http:\/\/www.iese.edu\/en\/companies-institutions\/supporting-startups\/business-angels\/\" target=\"_blank\">Business Angel and Family Office Network<\/a>,\u00a0is a researcher in the field of start\u2011up financing, venture<br \/>\ncapital and entrepreneurship in developing countries. Her\u00a0recently published work includes \u201cModelos de aceleradoras\u00a0para emprendimiento social: Tres casos pr\u00e1cticos\u201d\u00a0[\u201cAccelerator Models for Social Entrepreneurship: Three\u00a0Practical Cases\u201d] (at the publication stage), \u201cEl ciclo de\u00a0private equity en Europa: Gesti\u00f3n y adquisici\u00f3n\u201d [\u201cThe Private\u00a0Equity Cycle in Europe: Management and Acquisition\u201d] and\u00a0public policy for the development of private investment.<\/p>\n<p>She\u00a0holds a bachelor\u2019s degree in Business Administration from\u00a0the University of Oviedo and an MA in European Public Policy\u00a0from London South Bank University in the United Kingdom.\u00a0Before joining the IESE Network, she worked for the Inter-American Development Bank, the Centre for European Policy\u00a0Studies and the European Commission (DG Enterprise). She\u00a0is a member of the Advisory Board of Xcala, the initiative to\u00a0develop angel investment in Latin America.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>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 &#8216;crowd&#8217; of angels, or &#8216;equity based [&hellip;]<\/p>\n","protected":false},"author":1633,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[353,95632,78215],"tags":[89758,95633,61386,7970,1156],"coauthors":[],"class_list":["post-425","post","type-post","status-publish","format-standard","hentry","category-business-angels","category-crowequity","category-crowfunding","tag-business-angels","tag-crowdequity","tag-crowdfunding","tag-entrepreneurs","tag-private-equity","megacategoria-mc-entrepreneurship"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/posts\/425","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/users\/1633"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/comments?post=425"}],"version-history":[{"count":8,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/posts\/425\/revisions"}],"predecessor-version":[{"id":435,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/posts\/425\/revisions\/435"}],"wp:attachment":[{"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/media?parent=425"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/categories?post=425"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/tags?post=425"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blog.iese.edu\/entrepreneurship\/wp-json\/wp\/v2\/coauthors?post=425"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}