In recent years, raising money has dramatically changed in terms of how startups do it. In the past, the access to venture capital was pitching ideas in front of elite investors, where ideas were solely put up for funding. Crowdsourced venture capital, on the other hand, changes the game, allowing even the average investor into early-stage startups. Crowdsourced venture capital combines the best of crowdfunding with the principles of venture capital, making it easier for access to capital for founders, as well as an individual investor's ability to participate in the startup ecosystem.

What is Crowdsourced Venture Capital?

Crowdsourced venture capital is a model in which multiple investors pool their funds to invest in a startup or an early-stage business. Unlike traditional venture capital, which has a very few rich investors or institutions providing capital, crowdsourced invites people with different financial backgrounds to invest. Platforms such as Seedrs, StartEngine, and Republic allow individual investors, such as yourself, to invest as little as $100 in startups and get access to high-growth investment opportunities that are normally available to only well-off venture capitalists. That democratization of venture capital opens the door to more people to enter the startup economy. But for the startups, of course, it unlocks a broader pool of financing opportunities, accelerating growth and market reach.

How Crowdsourced Venture Capital is Changing the Face of Startup Funding?

  • Broader Access to Investors: Such traditional venture capital tends to be pretty exclusive due to the high net worth required to invest. Therefore, crowdsourced venture capital assembles a heterogeneous group of investors from different financial capabilities. Indeed, according to a report published by Statista, the crowdfunding market is expected to reach $25.8 billion by 2027 as everyday investors continue to grow their interest in this kind of investment. Crowdsourced venture capital accelerates funds to the startups and allows them to be raised by a wider and more relevant audience, which many times can consist of customers who are passionate about the product or service and are more likely to turn into brand advocates.
  • Reduced Dependence on Traditional Venture Capitals: Many start-ups do not secure traditional venture capital funding because their niche or innovative fields are below the cutoff line of typical venture capital profile. Crowdsourced venture capital has an advantage of breaking out from the constraints of the requirements of typical venture capitals, thereby making the funding landscape more open to new and innovative businesses, which might otherwise have a great deal of difficulty attracting funding. For example, PitchBook reports that fewer than 1% of startups actually secure traditional venture capital. Crowdsourced venture capital now gives such startups a different alternative of raising the considerable amounts of money needed without necessarily leveraging the traditional venture capitals.

Benefits of Crowdsourced Venture Capital to Investors and Startups

  • For Investors:
    • Investment in High-Growth Startups: Crowdsourced venture capital invests the investors at the earliest stages where the growth potential is huge. In most cases, early-stage investments are inaccessible for the retail investors; hence crowdsourced venture capital offers unique opportunities.
    • Diversification Opportunities: Investment in multiple startups can help investors diversify portfolios, and hence the risk associated with a single startup's performance decreases. Such platforms that allow investment by minimum of $100 make it easy for the investor to allocate funds across several different startups and industries.
    • High Returns: Early stage-startups are a high risk but also high return investments. Uber and Airbnb saw returns of over 1000% for its early investors. Crowdsourced venture capital offers a similar opportunity, but caution is warranted as one does need to be quite diversified considering the high risk of startup investments.
  • For Startups:
    • Community Involvement and Brand Advocacy: The crowdsourced venture capital way lets a startup build a community of brand enthusiasts and consumers who connect themselves with the mission of a company. A financial interest in a startup leads people to support and promote it better.
    • Funding Without Loss of Control: Most investors in venture capital are traditional and prefer a certain share of equity with more influence on business decisions. However, crowdsourced venture capital enables startups to secure funding without losing much control.
    • Higher Speed in Fundraising: Crowdsourced venture capital allows startups to raise funds faster compared to others. For instance, some crowdsourced venture capital platforms like StartEngine have seen some companies raising millions within days. The speed allows startups to focus on growth rather than spending months pitching to venture capital firms.

Top Crowdsourced Venture Capital Platforms

Several platforms lead the way in crowdsourced venture capital, featuring uniqueness in their offerings:

  • Seedrs: It is a Europe-based platform for the funding of startups that enables businesses to raise funds from accredited and non-accredited investors. In 2023, Seedrs had more than £2 billion in investments raised across multiple startups, which puts it into good validation as one of the biggest players in the marketplace.
  • StartEngine: In the United States, StartEngine allows any person to invest in a startup. In 2022 itself, StartEngine reported raising $900 million for a broad range of startups. That makes its platform appealing to a large variety of startups, giving investors a wide selection of industries to pick from.
  • Republic: This is another U.S.-based platform and allows fractional investments, targeting early-stage startups. The company has partnered with several major corporations to create unique investment opportunities that make it very popular among tech and non-tech startups.

Each of the platforms has specific requirements for investors and startups, offering an opportunity to each investor to pick one that suits his needs and interests best.

Risks of Crowdsourced Venture Capital

Although crowdsourced venture capital offers many benefits, there are risks involved such as:

  • High Failure Rate: According to Harvard Business School, 75% of companies funded by venture capital do not survive to raise a second round. That is a quite high rate of failure, and this means that even diversified investment portfolios will include a part of failed startups.
  • Illiquid Investments: Compared to the publicly traded stock market, investments in startups are illiquid, which means investments cannot be sold or cashed out quickly. Investors are expected to hold an investment for an indefinite period.
  • Lack of Regulation: This is because most of the crowdsourced venture capital platforms have some regulations, but still in most cases, they are less regulated than traditional stock exchanges and may increase the risk of fraud. The investor is supposed to do due diligence before he can invest.
  • Risk of Dilution: When a startup grows as well as takes extra funding, early investors may incur a loss on return if the company issues extra shares. This may also impact some returns since the company did not perform as expected in real terms.

The Future of Crowdsourced Venture Capital

Crowdsourced venture capital will even grow further as investment diversification into non-traditional assets continues to be on the rise. The presentation and management of crowdsourced venture capital platforms are now accessible, user-friendly and even better regulated with advancements in tech and regulation. According to CB Insights, the venture capital investment marketplace is expected to reach $1.3 trillion globally by 2027 and much of that, definitely through crowdsourced platforms as they enter the mainstream. As crowdsourced venture capital continues to grow, investors can look forward to accessing more high-potential startups while creating new opportunities for startups to raise money from a wider and more supportive investor base. This model has the prospect of forming a cornerstone of the startup ecosystem by combining the specifics of venture capital with the broad-mindedness of crowdfunding.