Entrepreneurship | August 24, 2020

Business founders embrace equity crowdfunding to raise capital during COVID

Jonny Price
Guest Author

Jonny Price

When the Detroit City Football Club faced financial challenges due to COVID, the owners didn’t turn to typical investors for capital to help the organization recover. The pro soccer team turned to the people of Detroit. In just a few days, the team’s Wefunder equity-crowdfunding campaign raised over $1 million from more than 3,000 fans and supporters, who in return became proud owners of their hometown team. If ever there was a historical moment for a democratic, community-based, people-powered approach to investing in startups and small businesses, this is that moment. 

As our economy continues to struggle under the crushing weight of COVID-19, investment crowdfunding is proving itself to be counter-cyclical. And as we look to rebuild in the months and years ahead, it is increasingly clear that a people-powered approach to funding startups and small businesses can play a valuable role in that effort.

Equity crowdfunding changes who gets financed

When I wrote this blog post back in March, my expectation was that investment crowdfunding would grow through the crisis. With founders finding it harder to raise from institutional or accredited investors, I suspected that their ability to raise capital from anyone, publicly promote their offering, and get exposure to Wefunder’s audience of over 600,000 investors would look significantly more attractive.

In addition, at a time when we have all been reminded of our shared humanity, and the importance of human connection, investing in your friend’s startup, or the coffee shop you love down the street from you, seemed like a small way that you could support someone you believe in, and make a positive contribution.

A few months later, the data now supports this hypothesis. The chart below shows total Regulation Crowdfunding investment volume (across all platforms) from July 2019 to July 2020. The significant growth since the start of COVID-19 is clear: Monthly investment has nearly doubled since February to almost $20 million.

At Wefunder (a Public Benefit Corporation and B Corp), our growth has been even more dramatic. Regulation Crowdfunding investment volume at Wefunder grew from $2.6 million in February to $6.5 million in July. Before the crisis, the highest number of companies we had launched in a month was 26. In July we launched 51. Last month, 5,487 people made their first investment in a startup on Wefunder – that’s 13% higher than our previous best month.

Community investors

In just the last few months on our platform, Lost Spirits, a distillery in Los Angeles, raised $1.5 million in a few days in March; in Seattle, Copperworks raised $1 million from their customers and community members during the height of that city’s Coronavirus crisis; and Everydae became another female-led startup to raise seven figures. In the week after graduating from the XX COVID Accelerator, Immersed raised $2 million. And GroGuru raised over $2 million from Startup Camp investors and angels in San Diego.

But Detroit City Football Club’s campaign was probably my favorite. As the campaign went viral, Investors filled the Wefunder Slack channel with messages. 

‘Demand dividend’ emerges as alternative to venture capital financing

“Wrote a paper last semester on how sports have a positive impact on a community… wanted to keep my word on that paper!” wrote a nine-year old student investor. “My 12-year old son is an avid soccer player and sure rising star,” wrote another. “I look forward to the team’s success and cannot wait to catch a game in the future.” There was more. “I invested because Detroit raised me and I wanted a piece of the city even though I no longer live there.” And, “Simple, I love Detroit,” to name but a few (read the full list here).

These new shareholders of Detroit City FC will go to more games, buy more merchandise, and cheer more loudly. They are now not just supporters, but owners. 

Product-market fit

COVID-related challenges faced by founders in raising capital from conventional sources have been an important reason for Wefunder’s growth over the last few months. But there are several other factors that have accelerated that growth as well.

Simplified cap table. Most importantly, 12 months ago, we were not truly able to roll individual investors up to one line on the cap table, which was a dealbreaker for many startup founders. But we recently fixed this problem. Now, Wefunder investors can be combined into one line on the cap table, which makes Wefunder much more attractive as an option for high-growth startups raising capital.

Lead investors. At the same time, we unveiled the ability for startups to recruit a “lead investor” on their Wefunder campaign. Lead investors help negotiate better terms for investors upfront, lend their credibility to the startup raising capital, protect individual investors in the round by voting for their shares, and might earn a 5% share of investor profits over time. Gabriel Weinberg (founder of DuckDuckGo), James Beshara (founder of Tilt), Daniel Ha (founder of Disqus) and Iggy Pop (the “Godfather of Punk” !!!) are a few examples of lead investors who have invested in startups on Wefunder over the last few months. And this list is growing quickly. 

Success stories. Wefunder is becoming a more and more attractive option for founders raising early-stage capital. More and more people are creating Wefunder accounts (so we can expose startups to more and more potential investors and customers). Our operational processes are continuing to improve. Our team is growing in size and experience. And case studies of success are proliferating (for three diverse case studies of success, check out Christine Outram’s blog post about how she executed on her $1.29 million raise; this analysis of how Neurohacker used Wefunder to grow revenue as well as raise capital; and this podcast about how Legion M see investment crowdfunding not just as a way to raise $10 million in capital, but as the basis for their entire business model).

Founder friendly rules. What’s more, a few months ago the SEC announced proposed changes to the existing crowdfunding regulations (see the proposed changes here, and our CEO Nick Tommarello’s comment letter in response here). While these are still pending, if and when these rule changes are enacted, they would also make Regulation Crowdfunding much more attractive to startup founders. For example, they propose lifting the limit on what startups can raise annually from $1.07 million to $5 million.

At Wefunder, our tagline is “invest in startups you love”. Now, more than ever, we believe that our community-based approach to raising capital can play a valuable role in helping startup founders raise the capital they need to grow, and spurring America’s economic recovery over the coming months and years. 2020 marks the dawn of a new era for Regulation Crowdfunding.

Jonny Price is the director of fundraising at Wefunder.