The Real Difference Between VC and Crowdfunding? Investment Marketing

A few weeks back the value of VC’s for the crowdfunding industry was extensively discussed. Why? Because there are lot of areas where crowdfunding and VC’s can connect. And though traditional funding and alternative funding are not as rigorously separated as many want to believe, there are some inherit differences that characterise crowdfunding as a different form of funding.

Tanya Prive in 2012 wrote an article on Forbes describing crowdfunding as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”. Rachel Chalmers refers to as VC money as “fuel for hypergrowth”. In addition, VC’s are in the business of making money for their own investors. Besides the target audience (crowd vs. VC) there doesn’t seem to be clear difference if we look at equity crowdfunding.

In both cases the investor profits financially, entrepreneurs are requested to deliver certain information and investors need to be convinced. Then why worry about the differences? Because, despite being marketed as the go-to Holy Grail of funding, most crowdfunding campaigns fail, only 1 in 10 succeeds on IndieGoGo (according to The Verge’s great article). And not because they were all bad investment opportunities. The problem was marketing.

Timing of the money

A first, very well visualised differenced can be found via Startup Guide: the timing. As you’ll see the type of funding for each phase varies a lot. Of course there’s some overlap but in general, VC’s won’t invest in anything that isn’t creating revenue yet. Crowdfunding on the other hand, has the reputation to be solely for start-ups. In my everyday job as Symbid‘s proposition manager where I coach the entrepreneurs in their funding, I see very different companies.

Small companies that have been in existence for quite a time (between 5-25 years); film funds that have a million dollar budget but want to do some form of inspiring marketing; individual entrepreneurs who still have to write down their business plan; growing start-ups that come back every year for another round and companies want fast forward their growth, using the money for “hypergrowth”.

Because crowdfunding lets the entrepreneur be in control of their own funding trajectory, it can be used any time they feel the time is right. Of course there are some exceptions (if you have no time for it, then don’t do it), but it is the entrepreneur that is fully responsible for the how and when of the funding process.

The reputation and differences in outcome

Crowdfunding was the first aid kit for capital when no one else will give you money. Crowdfunding is a necessary evil, having a VC is a luxury. But is that true?

Chalmers gives five very compelling reasons why you’d want to stay away from Venture Capitalists as an entrepreneur. In summary, a loss of control and narrowing down business development options. The idea that most successful companies raise money via a VC is a urban legend in Entrepreneurship Town; lots of companies succeed without that money.

Again, via crowdfunding the entrepreneur stays in control for the most part. Though a good VC investment can bring lots of good for a company, the company is a product that the VC needs to make money in. While in crowdfunding, there’s a sense of togetherness, sharing and support backed by money. Different ways of funding your company that have different results and different outcomes for you company. And with all the sustainable, social and consumers as “fans”, one might start to think equity crowdfunding is starting to become the epitome of involving your customer.

Self regulated fund raising as a basis for the process & dynamics

Entrepreneurs prepare a campaign when starting with crowdfunding, instead of a single pitch that appeals to all VC’s alike. This also means “one at a time” vs. a full blown marketing crusade: that’s a VC funding quest vs. a crowdfunding process. Whereas getting the right network and subscriptions to VC-networks gets the entrepreneur one appointment at a time, crowdfunding requires to think about ways to reach your audiences and target markets as successfully as possible.

Questions like: what am I selling to whom, who is my target audience, is my own network a seperate group, is there a difference between my customers and investors, where are they, how should I address them, should we send out a press release, and so forth are not at all uncommon during crowdfunding. Whereas a entrepreneur wouldn’t send out a press release about his appointment with a VC, nor would he continuously (almost obsessively) update his network about the progress.

Though the information used as a basis of communication (business plan, financial projections, etc.) is often the same, the ideas and literal message are very different. If an entrepreneur decides to root for VC, their business will be tailored for a specific payback. In crowdfunding, the campaign in itself, a small ROI and the opportunity to make something possible, are the expected outcomes.

Instead convincing the VC’s the entrepreneur engages; instead of saying “your investment makes ABC possible” and entrepreneur has to focus on “together we can..”; instead of talking to a superior or someone the entrepreneur is dependent on, they’ll talk to their peers. Crowdfunding is weeks of continued marketing efforts in order to gather funds bit by bit, while VC money are intermittent,  singular conversations that aim to get a large amount of money at once. These differences highlight the difference between the characterizing dynamics for each type of funding.

Investment marketing

In short, whereas VC’s money is hauled in by “closing the deal” and single selling moments, crowdfunding really is investment marketing. If we look at the dynamics during the campaign I could swap “the company” for any other product and it wouldn’t be called “crowdfunding” but “marketing”. Analysing and setting up various campaigns, the 4 (or 7) P’s are a great way to make entrepreneurs think about what they’re selling and how they’re attracting enough customers, emphasizing the strong marketing dynamics that really separate crowdfunding from VC funding raising.

 

McKinsey says ‘Business Needs More Women’: Crowdfunding Can Support This Goal

Why do we want more women in business? Practicing gender equality is usually not the reason one starts a company. Are men making a mess of our economies and companies? Is “the men’s world” not functioning or failing in creating sustainable growth within our economies? No, not really. The vast majority of men in companies are good people and devoted individuals. By no means are men the ‘wrong-doers’ and should be replaced because of such a (faulty) reason.Then why does this discussion matter?

Women make companies perform better

Numbers don’t lie, especially not when they’re provided by McKinsey & Company: companies with some 30% or more women in top level functions, perform better. A lot better actually, according to McKinsey & Company’s yearly report “Women Matter”. These companies have better return on equity, 11.4% vs. companies who have significant lower amounts of women in their top layer of the company. In addition, operating results are better (11.1% vs. 5.8%) and stock price growth is also significantly better (64% vs. 47%). Women like Marissa Mayer and Sheryl Sandberg are examples of what women could potentially contribute to a company.

In addition, in 2040 Europe is expected to need another 24 million people to tackle the workload, and women are already there. Another reason why we need more women on the work floor is that they’re usually the main decision unit in household purchases, and I’m not talking about groceries. Women spend 71% of the household budget. In Japan, 60% of the women are responsible for choosing a car (now there’s a man’s-world industry for you) and in Europe 47% of the PC’s are bought by women. Notice the “glam” redesigned notebooks that are now available? Notice the advertisers bragging about low weight PC’s? You know why. Then why is it that, according to the Boston Globe, a company pitched by men is 40% more likely to receive funding? And how can crowdfunding change that?

It’s Partially Women’s Own Fault

A lot of women simply approach things differently. If you ask women why a project was successful, about 70% will tell you they were lucky, they worked hard, etc. Men will tell you they’re awesome, says research. In addition, women tend to not discuss their success and attribute it to others (the team). Costa Rica’s first female president, Laura Chinchilla says women are seen as weak because of this: “We understand success not as the result of just one person but as the result of a team,” she told Forbes’ writer Jenna Goudrau. “[It’s a] different way of dealing with power [that] is misunderstood as a kind of weakness.”.

On top of that, women deal with “double trouble”. First, it’s difficult to what Sandberg (and McKinsey & Company) to the “double workload”: raising a family and developing your career. Reports show that in the case were equal companies pitched by either a man or a woman, the man was more likely to receive funding. The reason? Maybe a story sounds more familiar to man when it’s told to him by another man, we don’t like what’s unfamiliar. Much the same way society might prefer a female child care taker instead of male childcare worker, a.k.a. “Manny”..

The Solution is Part of the Problem

If we want more women in business, what’s stopping us? Well, the women are actually. They stick together in Women’s Clubs, Women’s Awards, etc. Personally, if someone ever handed me the award for “Best company with a female CEO”, I’m not sure I’d appreciate it: “Here’s your consolidation prize, now go play with the other kids”, or, “You’re not bad at all.. for a woman”. It sucks to be considered a second rank “leader”, or cheerleader, as was Sarah Palin.

Then why do women do this? Because men do it too. The (in)famous “old boys network” didn’t spontaneously come into existence. Men-only business and networking clubs (as insightfully described by The Guardian)  have existed for over hundred years, plenty of time to establish the beginning of the just as infamous glass ceiling. And even though “Women-only clubs” aren’t going to completely solve the problem, I can definitely imagine that it’s easier to pack some punch when somebody has your back. And why desperately try to build that back up framework with a group of people that need some serious convincing (men), when you have another group of people that is very willing and open to support you: women. And though I have some serious doubts about this form of separatism, there is one specific area in business where women might actually help each other conquer the business: online investing.

Women Investing in Women: online

In order to get more women in (offline) businesses we need to activate women to pick up projects or start up companies. Tough when you’re faced with the barriers above but much easier when you create an environment where those barriers are minimized. Women have the tendency to fund a larger part of their company themselves as it’s harder for them to come by via men, according to USA Today. The result? A company that has fewer resources to fully develop its potential. The solution? Ask a woman to crowdfund the initiative instead of raising funds in the traditional way.

First, the chances of raising funds via a lot better. 42% of Indiegogo’s successful projects are run by women, says Geri Stengel’s Forbes contributor. These crowdfunding campaigns are often mostly funded by other women, according to. They also raise some 11% more money than men, and according to USA Today, women make better investors because: 1) they focus on long-term, non-monetary goals; 2) they are less prone to take unnecessary risks and do quality research; and 3) that men trade 45% more than women, leading to a loss of 2.65% on men’s net returns. And women lead campaigns get 1.3 more followers than men lead companies, according to CrowdExpert.

How does crowdfunding success get more women in business?

Women get a fair chance. No (or less) bias, more access to more investors, both men and women that, in contrary to the established funding industry, are willing to take chance in a woman lead company. There is more money flowing in women’s initiatives, giving women the chance to prove their potential. In establishing great cases, more women like Sandberg and Mayer earn a place in the spotlight, increasing the society broad idea that women can actually achieve something. That way, more and more people (men and women) get the live demonstration of what already has been proven: women make business better.

Final note of the authorI’ve never been much of “we need more women”-person. I believe in hiring the best and if that’s not a woman, I’m fine with that. As a result I was totally unaware of the fact that companies with a certain amount of women perform better, before writing this article. In addition, doing my research for this article I’ve noticed this discussion is very extensive (and quite interesting really) and I haven’t addressed all the related points on purpose. If you have any subjects you’d like to touch, feel free to share them in the comments.