Crowdfunding to Avoid VCs

startup crowdfunding

It won’t be news to any startup that the investment industry has taken a hit during the pandemic. Every new deal is being viewed with caution and the brakes are being put on by VCs, and angels alike, while so much uncertainty pervades the markets.

One survey found that fundraising rounds were delayed for 40% of startups during the crisis and another found that 46% of investors are shifting their focus towards follow-on investments. With the upheaval in the fundraising landscape, Thang Vo-Ta, CEO and Founder of Callaly, reveals why he has turned to crowdfunding to raise capital.

Like all businesses, huge numbers of startups have felt the pressure over the last few months and, because many are loss-making, they rely heavily on cash injections and funding just to keep the wheels turning.

Of course, we’ve seen some sectors flourish. Subscription model and DTC companies have created some positive news – at Callaly we saw a 160% new UK subscriber growth between March and May – but that doesn’t always keep the wolf from the door. Whilst government funding has helped many with furlough payments, the support packages aren’t designed to help high-growth, R&D intensive companies like ours.

If we are to avoid job losses, we need to extend the runway as long as we can. And if VCs are being cautious, where is the money coming from?

Simply put, don’t think VC money is the default. In fact, consider actively avoiding it until the time is right.

This has been one of the guiding principles from day one in my journey to grow Callaly. To me, VC money is too costly, too time consuming and ultimately, an unnecessary burden for a consumer brand like ours. This is a view I developed when I was on the other side of the table, VC investing post dot-com bust, at Goldman Sachs.

The problem with VCs

What I learned, which is a view that has been confirmed over recent years, is that because VCs want to see growth, and they want to see it quickly, their cash can be fundamentally damaging for most consumer brands.

VCs are less concerned about your existing customers, or building brand value, or a loyal community of advocates over time. They’re not concerned about R&D or driving innovation in a sector which requires patience. Instead, their priority (and therefore yours) are conversions and a big high valuation exit. So, from the minute you take VC funds, your incentive structure is all wrong.

In order to chase growth, you are forced to spend beyond your means (not on R&D or brand value, but on social ads and low-quality growth). It is bad economics, which demands that you chase more funding, give away more of your company and the cycle goes on.

Founders are so often tempted by the overnight success story – the unicorn valuation in a matter of years, and at all costs.

Looking beyond VC investors

I get it. VC funding is a stamp of approval, its validation and frankly a huge ego boost but the sacrifices are too great. So instead, we’ve secured funding from alternative sources – starting with some loyal angel investors.

This isn’t a door that’s open to everyone. My background in banking and property acquisition gave me a solid foundation to go out and find cash. And trust me, when you’re seeking funding as a first-time founder, your network is everything.

Critically, we designed a product that was truly unique, opening us up to government funding specifically focused on innovation. We’ve won awards, grants and taken loans which capitalise on the fact we invented something the world needed.

Innovation loans are ideal for us. It’s one thing to invent a product, but for full and successful commercialisation you need to be able to produce it consistently, economically and at speed.

If you want to build something right, to the highest standards and without any compromise, while keeping all your research and product development here in the UK, you need patient partners. Innovate loans help companies develop their innovation and scale-up without demanding an instant return (and are low-interest).

Turning to crowdfunding

Finally, we’ve made a choice to take this to our community and to launch a crowd-fund during the pandemic. Why? Because our customer loyalty has never been stronger and our dedication to purpose speaks volumes to a consumer that is conscious and highly engaged with the brands they buy from.

People are looking for meaningful products and sustainable impact and this marks an opportunity for companies built on innovation and purpose. People are voting with their wallets.

What all this means is that I’ve taken decisions about where to seek funding based specifically on my strongest assets and what Callaly needs to thrive in the long-term.

All too often, knocking on the door of a VC seems like the only option but it’s critical for any founding team to look carefully at the alternatives, and being confident enough to say no to VCs until you’re ready.

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