April 18, 2023

Alternatives to VC-Funds: Crowdinvesting for Startups and SMEs

Financing your company is not always easy and often costly. But it doesn't have to be. If you too are looking for simple outside financing options for your company, you should not miss out on the advantages of crowdinvesting or at least consider this promising option.

In this article you will learn how crowdinvesting differs from conventional options such as crowdfunding or venture capital and how it can help you grow your business.

Executive Summary

  • Companies at all stages of development regularly require capital to finance their growth. Only a few manage this with the reserves of their equity. Many resort to debt financing.
  • Venture Capital (VC) funds enable off-market financing of often risky ventures. However, there are some drawbacks to VC financing.
  • Thanks to innovative technologies, namely blockchain technology, there are new and better financing options. One of them is crowdinvesting.
  • Thanks to tokenized shares and automated markets (Brokerbot), companies can sell their shares online and private investors can easily and quickly invest in companies of their choice.
  • If a company still decides to seek VC funding after a crowdinvesting, this is no problem thanks to a drag-along clause.

The Need for Growth Capital

Regardless of whether you work in a start-up or an established company: The vast majority of companies aim for progressive growth. And to achieve that, it takes a lot of capital. Maybe you want to expand your company into a new market, hire more staff, or make a strategic purchase of another company. Whatever your plans might be, if your own funds are not sufficient to finance these plans, it is worth considering the sale of company shares.

The Traditional Way: Venture Capital

There are several options for companies to raise growth capital, including bank loans, crowdfunding or venture capital. Above all, venture capital, which is provided by so-called VC funds, is known as an off-market investment of often risky companies. In such financing, the company sells shares to the fund in return for capital.

These are the advantages of venture capital:

  • Financially strong partners: large amounts of capital are available to VC funds because financially strong investors stand behind the funds.
  • Good network: The VC funds are often very well networked, since investing in a wide variety of companies is their main business. This benefits not only start-ups, but also established companies.
  • Great wealth of experience: VC funds are characterized not only by a good network, but also by the great wealth of experience of the investors, who are often themselves familiar with company formation and management.

However, there are also some disadvantages of venture capital:

  • High requirements: VC funds often take high risks with their financing; accordingly, they claim a say and tie the financing to high requirements. 
  • Loss of control: In order to obtain venture capital, company shares must be surrendered to the funds. This reduces the decision-making power of the company founders and, in the worst case, can lead to a de facto loss of control.
  • Unfair valuation: The amount of the VC funds' investment depends on their calculations of the company's potential future returns. The founders have little influence here and run the risk of their company being valued too low.

Thanks to innovative technologies, namely blockchain technology, there are now new financing options for companies that have envisaged a growth project. One of them is crowdinvesting through tokenized shares.

What is Crowdinvesting?

Crowdinvesting refers to the type of financing in which a company sells its shares directly to interested private investors without having to go public via an exchange. The sale of shares is usually conducted online.

It’s important to note that crowdinvesting should not be confused with crowdfunding.

Difference Between Crowdinvesting and Crowdfunding

The main difference between crowdinvesting and crowdfunding is the return on investment. With crowdfunding, you often—but not always—receive a gift. Also, it is not uncommon for capital providers to give an amount for altruistic reasons. In this case, no economic reward can be expected.

Here’s a quick example of crowdfunding: A restaurant owner wants to build a stage and buy instruments so that he can offer concerts as an evening event in the future. However, the project costs more than the owner can currently afford from his own funds. But he knows many returning visitors and therefore decides on a crowdfunding initiative. He turns to his guests via social media and asks for a small contribution between 5 and 100 francs. After only 2 weeks, the owner has collected the required sum and can now implement the project. In return, all contributors—depending on the amount of the contribution—receive a free drink, a free meal or are invited to the first private concert as guests of honor.

In Switzerland, there are many online platforms that handle the mediation work between investors and companies. Among the best known are wemakeit or lokalhelden.ch.

Whereas in crowdfunding the capital providers receive a gift in return, in crowdinvesting the return consists of a share in the company or a share in the profits.

(In the case of wemakeit, a platform known for crowdfunding, had itself launched a crowdinvesting to let the community participate in its company. This example clearly shows that the two approaches are neither mutually exclusive nor do they have to pursue the same goal).

Advantages of Crowdinvesting

There are several advantages of crowdinvesting over crowdfunding—for companies and investors alike. Here’s a list of some of them are the advantages of crowdinvesting specifically for companies:

  • Independence: with crowdinvesting, the company is not dependent on any bank, broker or intermediary and determines itself how many shares are sold and at what price. Control thus remains entirely with the founders of a company.
  • Attention: The launch of a crowdinvesting campaign can generate a lot of media attention and thus reach a broad target group.
  • Customer loyalty: Crowdinvesting allows existing customers to become directly involved in the company. This leads to increased identification with the brand and the product/service.

Benefits for investors include:

  • Access for small investors: Unlike VC funds, retail investors must, and now can invest in companies with relatively small sums. Furthermore, investors can invest in the early stages of a company without having to wait for the company to go public first.
  • Diversification: investors can diversify their portfolio by investing in many different companies of their choice. This allows retail investors to invest in companies they often buy from anyway.
  • Access to information: Investors receive a lot of information up front with crowdinvesting, giving them a good overview of the venture. This can include business plans, financial forecasts or even market analyses.

Different Options for Crowdinvesting

The simplest option for companies as well as private investors to benefit from the attractive opportunities of crowdinvesting is the sale of shares via blockchain. Both by tokenizing the company's shares and by adding a brokerbot (a user-friendly gateway) to the company's website, future funding rounds can be done quickly and easily. 

Find out what this might look like in our blog post on Security Token Offerings.

Is VC Funding Possible Despite Crowdinvesting?

One of the many advantages of tokenized shares is that VC funding is possible for a company even if it has distributed its shares to several hundred or even thousand private investors through crowdinvesting in the past. At least this is the case when companies use the toolset of Aktionariat, because a drag-along clause is integrated in the tokens.

What Does Drag-Along Mean?

Common agreements between shareholders include the drag-along clause, which allows a majority shareholder—in the case of VC financing, this would be the VC fund—to force all remaining minority shareholders to sell their shares. In practice, implementation is often complex and time-consuming, as all parties involved have to be contacted, a transfer agreement signed and paid for.

In this example, the advantages of settlement on the blockchain are once again apparent, as this process can be handled "on-chain" much more quickly and easily compared to the traditional way.

We have a whole article about the automatic drag-along mechanism in our documentation.

Conclusion

The goal of companies is usually continuous growth, for which they need capital. One way of raising capital is venture capital, which is provided by VC funds. In this process, the company sells shares in order to obtain capital. While this method of financing certainly has its advantages, companies must accept high requirements and, in the worst case, a loss of control.

Crowdinvesting on the other hand offers the possibility to get growth capital without having to follow the overly strict conditions of VC funds. With crowdinvesting, shares are sold directly to interested private investors—and thanks to Aktionariat this can happen directly on any Swiss companies’ website with a Brokerbot. Ultimately, this means that not only companies but also investors gain access to markets that were previously untapped or unreachable.

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