VC funding has taken a nosedive. Crowdfunding rounds? Not so much

To get her dream of opening a direct-to-consumer plant business off the ground, Eliza Blank bypassed pre-seed venture capital, instead bootstrapping and launching a modest $12,000 Kickstarter campaign.

Her startup, The Sill, targets customers who are busy, nature-starved city dwellers. It has since grown into a well-known plant brand with outposts in four US cities. In 2019, the company raised a $6.5 million Series A at a post-money valuation of $27.5 million, according to PitchBook data.

But three years later, the rosy outlook for raising venture dollars had faded. "Raising institutional venture as a consumer brand right now is difficult," Blank said.

So, with an operating loss of over $6 million in 2022 and just $800,000 cash-in-hand in September 2023, the startup launched an equity crowdfunding campaign on Wefunder, raising at a 73% discount from its last valuation.

Equity crowdfunding has matured in recent years and has remained resilient at a time when venture funding is increasingly difficult to access. There were 449 equity crowdfunding deals in the first half of 2023, about 10% higher than the same period in 2021 despite a drop from 2022 levels, according to PitchBook data.  

"If we were flush with capital, I wouldn't even consider it," Blank said. The Sill has previously secured backing from consumer brand-focused VCs like Five Four Ventures and Loft Growth Partners, but like many consumer-oriented startups, its VC pipeline has been adversely hit by the 2023 funding slowdown. The startup surpassed its initial crowdfunding goal of $50,000 and is nearing the $250,000 mark.

The method has become an increasingly popular tactic for founders who are either reluctant to dilute themselves or who are struggling to raise institutional capital in a stretched market. In 2020, the SEC increased the annual cap on how much startups could raise through crowdfunding from just over $1 million to $5 million, which was a major boost for the industry.

Even some small emerging managers and "micro VCs"—investors raising vehicles below $50 million—have taken to using crowdfunding platforms, according to Chris Lustrino, founder and CEO of Kingscrowd, a crowdfunding platform and data tracker.

"At the end of the day, it's deal flow, right? If they can access a deal and it's a good deal, why are you going to say no?" said Lustrino, who also is the general partner of Kingscrowd Capital, an index-like fund that invests using Kingscrowd's rating technology.

In a way, equity crowdfunding widens the playing field to amateur investors and can bring some greater transparency to private markets, as well as creating a cohort of "brand ambassadors" for consumer-oriented startups. Most crowdfunding platforms will require startups to publish more comprehensive revenue and cash burn numbers than founders are typically expected to disclose.

"We're opening up access to something that people haven't necessarily been able to participate in before," said Emily Pollack, head of US retail operations for equity crowdfunding platform Republic.

The growing frequency of down rounds in the VC ecosystem is readily apparent in the valuations that VC-backed startups are raising at on platforms like Republic and Wefunder. Kingscrowd recorded an average 20% downward valuation correction between January and August 2023 when compared to the same period in 2022.

The stigma around crowdfunding rounds has faded as more investors recognize the challenged market realities—and as some founders record remarkable success stories from the approach.

Fintech company Alto, for example, initially raised roughly $1 million in equity crowdfunding on Republic in October 2020. By early 2022, it had closed a $40 million round at a $290 million valuation with backing from Advance Venture Partners, Alumni Ventures and Acrew Capital, according to PitchBook data.

That kind of success grabs the attention of other founders, especially competitors, according to Pollack: "If thousands of people are investing in your biggest competitor, that competitor now has an advantage over you."

Featured image by Kseniya Ovchinnikova/Getty Images

This article originally appeared on PitchBook News