Community Round Explained: A Comprehensive Guide
The 'Equity Crowdfunding' industry first went live in 2016 following the implementation of the JOBS Act. But crowdfunding is typically associated with donations, pre-orders and a host of similar terminology, not investing. This has caused significant confusion over the years from media outlets, investors and raises alike. Many don't know the difference between regular crowdfunding and equity crowdfunding which has created an additional barrier to entry.
In response, Wefunder, a leading equity crowdfunding platform, launched communityround.com. Wefunder also implemented using the terminology "Community Round" in place of an "equity crowdfunding campaign."
What is a Community Round?
A community round is a type of investment raise where startups raise funds from their community allowing anyone to invest for a relatively small amount. In a community round, investors exchange their cash for a security interest in the startup they are investing in. This allows startups to raise funding to fuel their growth and gain dedicated life-long customers.
Are A Community Round and An Equity Crowdfunding Campaign the same thing?
Yes, a community round and an equity crowdfunding campaign is the same thing just different terminology. There is no difference between the two and neither is considered incorrect.
Community Round vs. Venture Capital
A community round and venture capital are both very different. In a community round, companies are raising small amounts of money from a large number of investors. These investors are typically found through the startups existing community or through marketing the raise online. Anyone can invest in a community round.
With venture capital, companies are typically raising a large number of funds from a small number of high net worth funds or investors. Venture capital tends to be a larger burden on the company as investors seek better terms, board seats and liquidation preferences.
Pros and Cons
There are a number of pros and cons associated with a community round. This is true when compared to other traditional financing methods.
Pros
Better Terms: Startups make their own terms so it allows startups to raise using a structure that suits them best.
New & Dedicated Customers: Startups can raise from their community and gain dedicated lifelong customers.
Dual Marketing: When you market your raise, you're likely to acquire new customers that are also dedicated investors.
Nearly anyone can raise: venture capital is incredibly exclusive with the overwhelming majority of companies seeking to raise failing. Nearly any legitimate company can raise through equity crowdfunding.
Relatively Cheap & Easy: Many platforms charge a flat rate and might charge a percentage of the amount raised. On average, companies dedicate between 15-25% of the amount raised to marketing costs and fees associated with a raise.
Cons
Regulatory Burdens: Issuers are required to file a yearly audit and raise update every year.
Difficulty Raising: There are often dozens of companies raising on platforms like StartEngine and Wefunder. This means issuers have stiff competition for investor dollars. Not all issuers are successful.
Limited Amount Raised: Through Reg CF, issuers can only raise $5 million per year. Through Reg A, issuers can raise up to $75 million per year.
Investor Limits: While anyone can often invest, many retail investors are limited to a maximum of a couple of grand worth of investments.
Where to Launch a Community Round?
There are dozens of platforms to launch community rounds on. Many of the smaller ones are perceived as less reputable so it's often easier to raise funds on the larger ones. The top equity crowdfunding platforms are:
StartEngine
Wefunder
Republic
NetCapital
DealMaker
But there are several others, and many are great potential platforms to raise on.
Marketing
Getting live is just the beginning. Once you're live, you now have to raise funds and hit your funding goals. Raising $5 million is an incredibly large amount of money and requires a comprehensive marketing plan to hit that goal. To hit $5 million, you would need about 10,000 investors to invest $500 each. On average, you should expect to spend between $1 million - $1.5 million if you wish to raise $5 million through equity crowdfunding if you can't directly raise the funds through an existing audience.
You can market your community round through organic and paid media, emails, friends and family and more. Having a comprehensive plan, including investors with confirmed interest in investing, is an important step in a successful community round.
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