Positive Signal
It's true that Community Rounds can be a "negative signal". And it's also true that they can be a "positive signal".
People often ask me: “Is it a negative signal if I run a community round? Does it look like I can’t raise capital from “real” investors?”
As with most questions, my answer (perhaps surprisingly) is: “It depends”.
Running a bad community round can indeed be a negative signal. And raising $5 million in a day from thousands of passionate customers and fans, as part of a larger venture-led round, is an emphatically positive signal.
Set an achievable goal. And quickly hit it.
A key question here is “How does the community round go?” If you over-subscribe your round in a day, that’s a strong positive signal. But if you are targeting raising $1 million, and you limp to $174K raised over 7 months, and you’re aggressively spamming your LinkedIn network that whole time, most people would agree that’s a negative signal.
And not only would this be bad optics in itself. But it would also further exacerbate the fundraising challenge. This is anti-FOMO. Wefunder raises that are lingering, and proceeding painfully slowly, are much less compelling to invest in, than raises that are moving quickly.
So how to eliminate the risk of negative signal from a weak Wefunder raise? Four ideas:
Make sure the investment is compelling.
Do you have a company people want to invest in? Can you (as the founder) pitch it effectively? Is the investment structure appropriate? Unless the answers to these questions are Yes, Yes and Yes, then hold off on launching your community round. To answer these questions, talk with the people that will write the first checks into your community round. And if you can’t find a growing number of anchor investors excited to invest, don’t launch publicly yet.Set an achievable goal.
In the hypothetical example above, of the founder who raised $174K in 7 months, if she had set a goal of $100K, perhaps she would have successfully raised this in 2 months. A much more positive signal. Now of course (and this is a key point in this entire blog post), $174K is more than $100K! The extra $74K she raises might be more valuable to her than the negative signal.
But generally speaking, I do think there is a lot of value in setting a realistic, achievable fundraising goal, and quickly blowing past it. You always have the option of increasing your maximum raise goal when you exceed it – which you can then do from a position of strength. Both Substack (initially set a $2 million goal, and then increased it to $5 million) and Levels (initial $2.5 million goal, quickly increased to $5 million) followed this playbook.
And purely pragmatically, I would strongly expect it to be the case that, if there are two identical Wefunder raises, and one has a maximum goal of $250K, and the other has a maximum goal of $2 million, the one with the goal of $250K will raise $250K more quickly.
Another consideration here is that, for a lot of startups, a community round might be part of a larger round. For example, a $250K allocation to let your customers invest, as part of a larger $2M round. So even if your total round goal is a larger number, your Wefunder raise goal might be a smaller component of that.Build up momentum in private, first.
Before publicly launching your community round, it’s usually important to raise a significant portion of the round in private. Wefunder has a nice UI for this – using phrases like “exclusive access” and “friends invest first”. Perhaps your early, “inner circle” investors get a discount on valuation through “early bird” terms (e.g. a $4.5 million valuation cap vs. a $5 million valuation cap for “regular” investors when the early bird fills up).
Founders often ask us “What is a good dollar amount to raise in private, before publicly launching?” Again, the answer is “it depends”. A general rule of thumb might be to raise one third of your goal in private, before publicly launching. But another way of looking at it is “the more, the better”. The closer you are to your maximum fundraising goal when you publicly launch, the quicker the public raise will go, and the stronger the positive signal.
But on the other hand, if you have a huge and rabid fanbase, and a realistic fundraising goal, then you can just push the public launch button more quickly.Flawlessly execute.
Obviously, a key part of quickly exceeding your goal on Wefunder is to run a great fundraising and marketing campaign. (This is a great guide we put together on how to do that). Nail the positioning and messaging. Strike the right balance between aggressive marketing, without appearing thirsty. Inspire and activate your customers and community. Hustle hard. And – as with all aspects of being a founder – do whatever it takes to win.
It doesn’t matter. If you’re not on the VC track.
With all this being said, it’s important to consider whether the “Big Scary Negative Signal Boogey Man” actually matters for you and your company. Is that black shadow on the wall behind you actually a big scary monster that might eat you? Or is it just a kid making a “rabbit ears” gesture with their hand near a light?
If you’re intent on pursuing the Venture Capital Track, then signal usually does matter. And you’re right to be thinking about it.
But if you’re in the 99% of startup founders raising capital, who will never raise (and/or do not want to raise) venture capital, then it almost certainly doesn’t matter whether “some investors” might see your community round as evidence that you can’t raise capital from “them”.
We certainly don’t care about it. Wefunder is a Public Benefit Corporation on a mission to get more capital flowing to founders. As a company, we believe that – for a bunch of reasons – if more founders are able to raise the capital they need to take their shot, this will be a stronger economy, and a better world.
And so this means we are excited about founders using Wefunder to raise capital, where conventional (e.g. VC) investors might be too risk-averse or narrowly-focused to invest. These “negative signals” are our whole reason for existence!
It doesn’t matter. If you have a VC lead the round.
But let’s say you are in the minority of founders who need/want to raise venture capital.
In this case, if you’re worried about negative signal, just have an awesome VC lead the round.
Done.
Community rounds don’t need to be an either/or vs. VC funding. In fact, the most “prestigious” (at least as defined by VCs) are ones where VCs lead the round, and the startup’s customers follow on.
Mercury and Replit are good examples of this. Mercury raised a $120 million Series B, and then let their customers (startup founders) invest on the same terms as the VCs (Coatue, Andreessen Horowitz, etc.). Replit raised an $80 million Series B, and then let their community of software engineers invest on the same terms as Paul Graham.
We think it’s awesome when startups let their customers and community invest. And if a VC leads the round, and sets the terms, then it completely eliminates any risk of negative signal.
Here’s Immad Akhund, the founder of Mercury (at least this is what he said in my mind): “Umm, no. We didn’t need the money. And we weren’t “struggling to raise capital from VCs”. We just closed a $120 million Series B. We just thought it would be cool to let our customers invest in us. And it was.”
I actually had this conversation with a VC friend once. It was very satisfying.
Me: “What do you think about your portfolio companies running a community round with Wefunder?”
Him: “Hmm. I don’t think so. I would be worried about the negative signal.”
Me: “But didn’t you invest in them?”
Him: “Yes.”
Me: “Do you invest in bad companies?”
Him: “No.”
[pregnant pause]
Me: “So doesn’t that take care of the negative signal risk?”
[another pregnant pause]
Him: “Yeah I guess so.”
And then he made an intro to a portfolio company that ran an explosively successful community round on Wefunder.
It doesn’t matter. If you use the money to build a great company.
So (1) the “negative signal” doesn’t matter if you’re not looking to raise VC money. And (2) it’s eliminated if you have a VC lead the round. The last case is the most nuanced of all – (3) you are on the Venture Capital Track. But you can’t raise an institutional round yet, or right now.
In these cases, the “negative signal” that you “can’t raise capital from VCs” is obviously justified. It is true. (And hopefully, by now, it is abundantly clear that my copious use of “quotation marks” and Capital Letters in this blog post references my deep skepticism of a lot of VC “wisdom” and “convention” in this domain. At best, concerns around the “negative signal” of a community round are just misguided – for example, because the VC doesn’t know that Wefunder investors can be rolled up to 1 SPV on the cap table, or doesn’t know about case studies like Mercury or Replit. And at worst, they’re deliberately self-serving – a cynical attempt to preserve stature and management fees in an early-stage investing world that’s inexorably destined for the same democratization that they gleefully funded, and enriched themselves on, in the cases of Uber, Twitter, Airbnb, Robinhood, Coinbase, etc. etc. etc).
But I digress…
Let’s say you’re a startup founder, intent on raising from VCs, but you can’t get a VC to lead this round (right now).
If you don’t need the money, then maybe you keep hacking away in ramen mode, without diluting yourself – often the best option.
But if you do need the money, your two options are: (1) Raise capital by any means necessary (e.g. Reg CF is one option), even if it’s a “negative signal”. Or (2) Shut down the company.
The point here – founders should weigh the perceived costs of negative signal, vs. the benefits of just raising the money.
Especially because – if you do raise the money, and use it to build a great company, then (and this is very, very important!) the VCs will be lining up to invest in the next round. I’m not saying “who is on your cap table” is irrelevant. Of course, it’s one factor that any investor will factor into their evaluation of whether to invest. (And by the way, this goes for “who the VC is” – e.g. Tier One vs. not – as well as “whether there was a VC”).
But I am saying that you can trump the last round’s cap table signal with a growth chart.
If you’re growing like a weed. With an awesome team. And a huge TAM. And 1 SPV on your cap table (from your Wefunder community round). Any good VC will invest because of the financial upside.
And to extend this point further, if raising capital from your customers and community will allow you to hire the team you need to build a great company. And if recruiting thousands of customers as an army of brand ambassadors and supporters will accelerate your growth. Then this will actually increase any decent VC’s appetite to invest in the next round!
An army of customer-investors is a valuable asset, and a competitive differentiator, that’s going to help your startup win. And trump any negative signal risk.
I chatted with a founder recently, whom I had first chatted with a year ago. Back then, he had avoided running a community round with Wefunder, because he had been told not to do it by a VC, because it was a “negative signal”. But unfortunately, that VC did not invest – despite the “positive signal” of the founder not running a community round. A year later, the founder’s runway was depleted, his leverage was shot, and he was in a much weaker position to raise capital. Boo.
Positive Signal.
If you can’t raise capital from VCs, and you want to. If you screw up the execution of the raise, and set a goal that’s unrealistically high for the stage you’re at. Then, for sure, raising capital on Wefunder can be a negative signal.
But if you line up a VC to lead and price the round. And then you raise $5 million from thousands of your customers in less than 24 hours. Because you agree with us that there’s no better way to delight your customers, and no better way to build community, than by letting them invest in your startup. And because you agree with us that it’s (dare I say) noble to let your earliest supporters share in the upside you create, as well as your VC investors. There’s no more positive signal.
Good article. I would say don't underestimate the slow raises too.
One slow raise that I can think of is Metabilia.io (I got it app) in 2021. Their raise was like watching paint dry but they are doing well today.
I’ve seen a ton of fast raises that turned out to be busts too. It all depends.