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This is a guest post by Lee Hower of Boston venture capital firm NextView Ventures.

The rise of crowdfunding in the last three to five years as a source of capital has been remarkable. Tech startups and potential investors have had greater access to one another than ever before, and beyond the startup world, a broad array of projects have been able to successfully seek capital via crowdfunding.

But contrary to some speculation about the two overlapping in their uses, crowdfunding and VC seed funding can each be raised for distinctly different situations.

Navigating Crowdfunding Platforms

Before understanding which approach is right for your company, we need to first parse the crowdfunding universe a little bit, as people use this as a catch-all term encompassing a range of different activities across distinct ecosystems. To clarify some of the nuance:

Equity Crowdfunding – This is crowdfunding activity that comes directly in the form of investors buying equity (or convertible debt which is akin to equity) in startups themselves. Because of SEC rules on investing in private companies, this type of funding could only come from “accredited” investors who meet certain thresholds of wealth or income. The primary equity crowdfunding marketplace has been AngelList of course, though there are others like FundersClub. And once the specific rules of the JOBS Act take effect, you may see other platforms get involved in equity crowdfunding.

“Project” Marketplace Crowdfunding – This is crowdfunding for a wide range of projects ranging from creative endeavors (books, movies, bands, etc.) to inventions to non-profit organizations. Typical platforms include IndieGoGo, Kickstarter, Quirky, and more. Funders’ contributions are essentially donations (which is why this is sometimes referred to as “donation crowdfunding”) that don’t entitle them to a slice of ownership in the company raising the capital, but rather perks like recognition or pre-ordered products.

Vertical Crowdfunding – Similar to the broad crowdfunding marketplaces, we’ve been hearing about these industry-specific crowdfunding platforms more and more in the last 12-18 months. They target a particular vertical or type of business (e.g. CrowdStreet for real estate projects or Dragon Innovation for hardware/device companies).

So when does crowdfunding make sense for a tech startup?

Project or donation crowdfunding can make sense for startups building a consumer product, typically with at least some physical hardware component. There are now many examples of companies that raised non-dilutive capital for building early versions of their product via crowdfunding prior to raising VC capital — Oculus is perhaps the best known example because of their ultimate acquisition by Facebook. But SmartThings, OUYA, and other consumer product startups have taken a similar path.

Also, there are a lot of product inventions or businesses for which VC funding may not be a good fit, in which case crowdfunding may be a viable alternative for getting things off the ground. (For instance, perhaps the company won’t be venture scale and thus won’t attract that kind of funding.) The advantages of project crowdfunding can be the potential to raise a small amount of early capital quickly. In addition, project crowdfunding can be a useful way to identify and connect with early adopter customers who provide feedback and are loyal ambassadors for your brand.

But for those startups doing something other than a consumer product, project crowdfunding usually isn’t a viable path. And even those startups that do raise some capital through project crowdfunding often still seek a VC round either at the seed or Series A or B stages. Furthermore, while a few high profile successes raise hundreds of thousands or even millions in their campaigns, the average amount raised from a crowdfunding campaign is less than $10,ooo. So unless you have dramatically successful campaign, project crowdfunding won’t raise a substantial sum for your startup.

What about equity crowdfunding?

Equity crowdfunding is still in its infancy. When platforms like AngelList started, the knock was that these marketplaces weren’t effective for raising a seed round from a standing start. If you had half of a $1 million round already committed from name-brand investors, AngelList certainly could help you fill out the remainder of the round, but it wasn’t much help getting you from $0 to something meaningful — so goes popular opinion.

But in the last year or so, the dynamic has changed. More angel and VC investors are on AngelList than a few years ago, in addition to the launch of “syndicates” (groups of investors coming together and often partnering with more institutional VCs). This means some prolific angel investors can now speak for a larger portion of a seed round and act as a lead investor. These trends, together with the rise in even more equity crowdfunding platforms emerging, means that this option to fundraising can play an important role in raising capital for a broad range of startups &mdash; though it should be noted that even those that raise some of their round through these platforms typically connect with VCs and angels the old fashioned way too.

As with “offline” channels, one platform won’t make up the entirety of a startup’s fundraise in most cases. Usually, it takes several approaches and combinations of warm intros, syndicate partnerships, CEO referrals, cold outreach, accelerator demo days, and now, crowdfunding platforms (and many more avenues) … all worked in tandem by the entrepreneur to successfully raise.

When are VC seed rounds the best option?

VC seed rounds are a good fit for innovative tech startups with the potential of building a “venture” scale business: roughly the potential to go from startup to a $50-100 million revenue business with an enterprise value of hundreds of millions or billions in 5-10 years.

These are companies that are likely to go on to raise substantial additional VC capital as they grow. The potential advantages of raising a VC seed instead of (or in some cases, in addition to) pursuing project or equity crowdfunding include:

• Highly-engaged, value added investors (relative to smaller and/or passive investors via crowdfunding).

• Investor syndicate which has greater capacity for follow-on investment in future funding rounds.

• Name-brand recognition of your investors, which can be helpful in hiring talent or gaining credibility with partners, press, and future investors.

To be clear, none of this is a black or white choice. Some startups may be a fit for VC seed, some for crowdfunding of various types, some both, and some neither. The rise of crowdfunding platforms coupled with increased options for angel or VC seed capital means entrepreneurs today have a broader array of choices for startup funding than 10 years ago.

Finding backers for a speculative new venture is about finding the true believers rather than convincing the skeptics. So entrepreneurs who carefully consider which paths might be the best for their startup, and where they might be more likely to find true believers, are certainly more likely to have a successful and more efficient fundraising process.

Lee Hower is a co-founder and partner at the seed-stage VC firm, NextView Ventures.

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