Who should run a community round?
There are two distinct use cases for founders to run a community round.
Firstly, because you have a community that loves your startup, and you want to let them invest.
And secondly, because you want to raise capital more quickly.
Use Case #1: Let my people go surfing (and also invest in my startup)
In 2021, Mercury Bank raised a $120M Series B from Coatue, Andreessen-Horowitz, and other VCs. They were delightfully well-funded, and didn’t need any more money. But they thought it would be cool to let thousands of their customers invest in them, on the same terms as the VCs. So they extended their Series B by an additional $5 million, and raised that on Wefunder in a day.
In 2022, Replit raised an $80M Series B from Paul Graham and other investors. They also didn’t need more money, but decided to let their super passionate community of software engineers invest in them – firstly, because they thought it would strengthen their community. And secondly, because they thought it was the right thing to do. As their founder Amjad Masad puts it in their community round case study:
“A lot of people contribute to Replit’s success and have asked to be part of our journey and get part of the upside. Some people have even called us out as hypocrites. They've said things like, “You talk a big game about making programming more accessible, but you take money only from the ivory tower of Silicon Valley. Why wouldn’t you let investors like us invest?” I thought those were reasonable arguments.”
Like Mercury, Replit also raised $5M from their users in a day.
Levels, this newsletter platform(!), Arrived – the common theme for this first use case is startups with passionate customers and communities. Founders of these companies share my conviction that – if you invite your community to invest in your startup, good things will happen.
Delighting your customers is generally an advisable thing for startup founders to do. And if you read the investor notes from Substack readers and writers on their Wefunder page here, it’s emphatically clear that a very powerful way to delight your customers, is by letting them invest in your startup.
And especially if you’re building a community-oriented business, then strengthening that community is generally an advisable thing to do. And you know a powerful way to strengthen your community? Yep, you guessed it. Give them all free cookies. Let them invest in your startup.
One of the biggest concerns that founders have about running a community round is the “negative signal” it might send to VCs. “Oh this startup had to resort to a community round because they couldn’t raise from VCs”.
But startups in this first use case can easily bat that concern away. “Nah, we just thought it would be cool to let our community invest in us. And it was.” (These “signal” concerns are even more irrelevant if there’s a VC leading and pricing a larger round, which the Wefunder community round is a part of).
It's probably obvious, but just to be explicit – our conviction at Wefunder is that, if your customers invest in your startup, they will spend more money with you, be more loyal and churn less, be more passionate brand ambassadors (NPS to the moon!!!), be willing to help you connect with strategic partners, potential customers, hiring candidates, etc. etc. etc.
Use Case #2: Raise capital more quickly
Some startups have VCs throwing money at them. For example, any startup in 2023 whose domain ends in .ai. Or any startup in 2020 that was “building on the blockchain”.
But for the vast majority of startup founders, it’s hard to raise from VCs. Maybe you’re too early and you “need more traction”. Maybe you’re a black woman looking out at a sea of white dudes with checkbooks. Maybe you don’t live in Silicon Valley, New York City or Boston. Or maybe your startup just doesn’t make sense for venture capital funding, because its TAM doesn’t start with a B.
For example, let’s say you’re a biotech founder working on a drug that can cure a rare disease. But the number of cases per year of that disease is a small number – too small for VCs to be interested in investing in you, given the science risk ahead of you. That’s where Use Case #2 comes in.
There are a few ways in which community rounds can make it quicker and easier for founders to raise capital, if they’re struggling to raise through more conventional channels:
Now everyone can invest in your startup, not just the 5% of the population that is “accredited”. Accredited investors (i.e. very rich people) can still invest. But now everyone else can invest as well. And that’s just a much bigger pool of potential investors to get in front of.
Through Regulation Crowdfunding, you can publicly promote the investment opportunity – as an email blast to your customers, on social media, in the press, on a podcast, through an investor webinar, etc. etc. In the example of the biotech founder working on a cure for the rare disease, a community round lets you communicate about your company (and your capital raise) to patients and their families. And while a VC might not be able to invest based on the financial returns, the community of people afflicted by the disease you’re endeavoring to cure might be much more open to writing a check.
Wefunder has millions of potential investors that we share your community round with. The amount of money you will raise from Wefunder’s existing investor base (vs. investors that you bring to the party) varies significantly between campaigns. Across the 50+ Y Combinator companies that have run community rounds on Wefunder, the average has brought in over 60% of capital from repeat Wefunder investors. Although the average is more like 30% coming from Wefunder’s existing investor base, with 70% coming from first-time investors (i.e. people you bring). But whatever this percentage ends up being, it’s free money that you get by raising capital on Wefunder.
Especially at a time when everyone feels a little less wealthy than they did in 2021, many founders have realized value in being able to roll up a number of smaller investments into 1 SPV on the cap table. For example, perhaps a number of potential investors in your network are reluctant to write $25,000+ checks. But they might be in for $5K or $10K, or even $1K.
Usually, raises in this Use Case #2 are smaller. The Use Case #1 raises I cited above (Mercury, Replit, Substack, Levels, Arrived, Curlmix, etc.) – are all $5M+ raises. But Use Case #2 raises might average more like $300K. Sometimes this is part of a larger round, that’s just taking a while to come together. Sometimes it’s a stand-alone (e.g.) bridge.
Sometimes it’s a super-charged friends and family round, or the first outside capital into a startup.
If you’re in ramen mode, even $124K might be a meaningful amount of money to extend your personal runway, and enable you to make more progress, and generate more traction, before coming back to the market to raise a larger round, when the fundraising landscape is a little less bleak. (If you cap your community round at $124K, you don’t need to pay a CPA to review your financials, so you save a little money on conducting the raise).
Explosive, $5M-in-a-day Substack raises are a lot of fun. But Wefunder’s Public Benefit Corporation mission is also about enabling more founders to raise the capital they need to take their shot. That’s Use Case #2.