Is crowdfunding right for your company? Take the fanbase test

Equity crowdfunding is right for your company if thousands of small investors would be worth something to you beyond their checks. That is the whole test. If those investors would buy your product, tell their friends, and defend your brand in a comment thread, crowdfunding gives you capital and a fanbase in one campaign. If a fanbase would do nothing for you, crowdfunding is an expensive way to raise money you could probably raise elsewhere, and you should look there first.

Most founders who come to me have already decided on crowdfunding. That is fine. I am not going to argue with the decision. I am going to ask you to pressure-test it, because the founders who answer this question honestly before launch are the ones who either save themselves a lot of time and money, or commit to the raise with their eyes open.

Why the money is not the point

A Reg CF raise is not cheap and it is not fast. It takes months of preparation, dozens of decisions, a team of outside parties, and real money spent before the first dollar comes in. Raised from a crowd, a million dollars might mean a thousand or more individual investors.

If all you want is the million dollars, that is a lot of overhead for it. A single accredited investor or a small angel round can write the same check with a fraction of the work.

So the question is not "can we raise money this way?" Many companies can. The question is "do we want what comes with it?" What comes with it is a crowd.

What a crowd of investors can do for you

When the fit is right, the crowd is the best part of the raise. Investors who own a piece of your company tend to:

• Buy from you. They want the company to win, and buying the product is the most direct way to help.
• Spread the word. Every investor is a person with friends, family, and a social feed. A crowd of owners is a word-of-mouth engine you did not have to pay for twice.
• Champion the brand. They answer skeptics in the comments, show up for launches, and vote with their wallets when you ask.
• Fund the next round. Your first round's investors are the warmest audience for the second. More on that in How to raise again from your existing investors.

That is the real return on the overhead. One caution: the relationship runs better from investor to customer than from customer to investor. A big customer list does not guarantee a raise. See Investors make good customers, but customers do not make good investors.

Who passes the fanbase test

Consumer products are the ideal fit. A food brand, a beverage, an apparel line, a consumer app, a product people use and talk about. Every investor is also a potential customer and a potential evangelist, so the crowd pays off long after the raise closes.

Companies with a mission people want to be part of also pass, even when the product is not something an investor buys every week. Housing, energy, and local businesses with a loyal community are common examples. The test is whether ordinary people would feel proud to own a piece of it, and whether that pride turns into attention you can use.

Who fails it

A business that sells to other businesses, or to a handful of large buyers, usually fails.

I once spoke with a medical device company that was considering crowdfunding. It did not sell direct to consumers. Its buyers were hospitals and the people who run their purchasing. A thousand enthusiastic individual investors could not move that needle. They could not buy the product, and their word of mouth would not reach the people who decide. The company was already raising from angels and venture investors, and that was working. It kept doing what worked. That was the right call.

Failing the test is not a judgment on the company. It means the main advantage of crowdfunding does not apply to you, so you would be paying the costs without collecting the benefit.

The test, as questions

Answer these honestly before you commit:

1. Would our investors buy what we sell? If the answer is "they could not, even if they wanted to," that is a strong sign against.
2. Would our investors' word of mouth reach our buyers? If your buyers are a few procurement teams, it probably will not.
3. Is our story one ordinary people would want to share? Investors buy the mission before the metrics. If the mission is hard to explain at a dinner table, the crowd will not carry it.
4. Do we have, or can we build, an audience before launch? A crowd raise opens to the people already paying attention. If nobody is, you will need months of Testing the waters to change that.
5. Can we afford the up-front work? A raise needs preparation, assets, legal work, and ad spend before it can fund itself.
6. Is there a simpler way to raise this money? If an existing angel or venture network is already funding you, be clear about what crowdfunding adds before you leave it.

If most of your answers point toward the crowd, lean in, and lean in all the way. If most point away, the best outcome of this exercise is the time and money you just saved.

What if we fail the test but still need the money?

Then crowdfunding is probably not your path, and that is a useful answer. I specialize in crowdfunding, not venture or angel investing, so I will not pretend to be your guide there. But the broad options are bootstrapping, revenue-based financing, debt, grants, angels, and venture capital. Equity crowdfunding vs traditional ways to raise money compares what each asks of a company.

If you pass the test and want to know which kind of crowd raise fits, Reg CF, Reg A+, or a Rule 506(c) offering alongside one of them, the exemption choice is the next decision. For most founders, it is Reg CF.

FAQ

What kind of company is equity crowdfunding best for?

Companies that get value from a large base of investors beyond the money they invest. Consumer products are the ideal fit, because every investor can also be a customer and a source of word of mouth. Mission-driven companies with a loyal community also tend to do well.

When is crowdfunding a bad idea for a startup?

When a fanbase would do nothing for the business. A company that sells to a few large buyers, like a medical device maker selling to hospitals, carries all the costs of a crowd raise without its main benefit. If angels or venture investors are already funding you, keep doing what works.

Is equity crowdfunding cheaper than raising from angels or VCs?

Usually not. A well-run crowdfunding raise takes months of preparation, a team of outside parties, and real money spent before launch. What it buys is a crowd of owners who can become customers and advocates, which a small angel round does not give you.

Should consumer brands use equity crowdfunding?

Often, yes. A consumer brand gets the most from a crowd of investors, because those investors can buy the product, spread the word, and fund the next round. A large customer list alone does not guarantee a raise, though, so plan to build an investor audience before launch.