For nearly a decade now, crowdfunding has been sold as a revolution in “startup” financing. For most of that time, the hype has exceeded reality. The vast majority of credible early-stage companies have continued to raise capital conventionally, from accredited investors in private financings. Crowdfunding websites faced a huge “negative selection” problem in that only the lowest quality companies (those who all sophisticated investors rejected) resorted to crowdfunding, which resulted in little enthusiasm among the “crowd” and weak results in terms of investment performance.
Things may be changing, at least in the CPG startup market, particularly food. Over the past year we’ve seen a significant uptick in credible CPG companies, with customer and partnership traction, using crowdfunding as a way to raise capital. The one platform that appears to be pulling ahead of the pack is Republic; which spun out of AngelList, one of the more popular fundraising platforms in the tech space.
While we are not seeing Republic replace conventional private funding among CPG Startups, we’re seeing companies look to it as a parallel channel both for raising incremental capital and also building awareness of their brand. Unlike an AI or B2B software startup in the tech space, people who review crowdfunding portals aren’t just potential investors, but also customers of a CPG startup. They also tend to be high-income, internet savvy, and enthusiastic early adopters.
The typical profile we are seeing among early-stage CPG companies is raising a conventional round from angel investors, but reserving 20-25% of the round to be filled in by a crowdfunding campaign of a few hundred thousand dollars up to $1-2 million. Importantly, startups are not using crowdfunding as their first funding. By the time companies arrive on Republic, they have credible branding, customer traction, and a clear distribution plan, usually funded with bootstrap or “friends and family” funds, and possibly some very early angels.
We don’t expect crowdfunding to ever replace conventional early-stage funding from angel investors and VCs, but its growing credibility among serious entrepreneurs is noteworthy. However, keep in mind that the crowdfunding securities regulations are hardly “DIY” simple. You need to work closely with advisors who understand the securities regulations and market norms to ensure that you don’t make any missteps, because the platforms themselves are fairly “hands off” in how much guidance they feel comfortable providing from a legal perspective.