The famous saying “Small streams make big rivers” reflects perfect crowdfunding. Better known by its English name crowdfunding, it is based on a device that makes it possible to fund projects thanks to more internet users. Their helping hand can take various forms: donation, gift against reward, loan or equity investment, which consists of buying shares. Crowdfunding (CF) platforms actually offer a wide range of financing options.
At the same time, Business Angels (BA) have already been investing in entrepreneurial projects for years. They are private investors, motivated by the desire to help young entrepreneurs succeed. These entrepreneurial adventurers have solid experience in setting up or running businesses.
Business Angels and crowdfunding can be pillars in the financing of SMEs and start-ups. Their field of action is similar. Which of the two should one choose?
Business angels: who are they?
In addition to funding, the BAs advise young entrepreneurs on strategic choices related to management, leadership, marketing and business development. Their relationship is characterized by a certain cultural and cognitive proximity as well as geographical proximity. The effectiveness of the accompaniment is based on physical encounters.
BAs provide their patrons with a network of contacts and represent a guarantor with other investors. Their help greatly enhances the projects they support. In 2014, the BAs made it possible through a leverage effect to multiply the total amount invested by 3.4, ie a total of 110 million euros.
A study conducted by France Angels, an organization that brings together local BA clubs in France, showed that their main motivation is to participate in entrepreneurial adventures, before financial motivation and the desire to reduce taxes.
Before investing, they perform an in-depth audit called due diligence to assess the potential of the project. The BAs then adjust their interests and the contractors’ interests through detailed contracts. Most often, they use preference shares, convertible bonds, conditions to make funds available according to the achievement of set targets.
They are also fully aware of the risk of dilution associated with refinancing. In fact, many seed projects require more investment.
In order to best support companies, it is preferable that BAs meet certain criteria: have entrepreneurial experience as well as experience in the company’s industrial sector, devote more than 20 hours to due diligence and actively support companies that they support.
Crowdfunders: who are they?
Crowdfunders have more heterogeneous experiences than BAs. Although the majority take a passive stance, some achieve a real expert status through their actions, opinions and comments on CF platforms. These active supporters disseminate information to non-experts and promote the projects they support. However, they seem quite motivated by the search for social benefits.
The procedures differ from person to person. Crowders are part of an economic logic, while Internet users are part of an affective logic. As with BAs, societal and altruistic motives can cause them to accept higher risk or lower returns.
The CF platforms study and select the projects. Most often, crowdfunders only intervene for funding. However, some platforms such as WiSeed involve them in the selection process. It is a form of testing that makes it possible to measure Internet users’ interest in the projects. In addition, CF platforms enable projects to benefit from high visibility with the public. The entrepreneur can thus refine his offer and identify his first customers.
After the evaluation of the projects, the CF platforms use standard contracts, the investment instruments are generally individual shares.
Regarding the risk of refinancing, crowdfunders are not always informed. Some do not always have the necessary funds for another round. The project may then disappear due to lack of resources.
What to choose?
BA and crowdfunding are therefore two different solutions with their advantages and disadvantages. Is it better to call on an angel or mobilize a crowd of crowdfunders? A third way would be a clever mix of the two. It is up to the leaders of young companies to make the choice that best suits their needs. Roads for reflection can be offered. To make projects more visible and validated by consumers, CF platforms based on the voices of Internet users seem more appropriate. BA analysis is more suitable for business projects that require complex analysis or confidentiality.
Finally, in the case of co-investment, most BAs are active investors (“practical experience”). They provide follow-up that adds more value to the project they support, while some CF platforms behave passively.