Community rounds are a type of funding round launched by startups to allow everyday investors and members of a startups community to invest in that startup.
When someone launches a raise through an equity crowdfunding portal, the round is referred to as a community round. Unlike traditional venture capital funding, community rounds provide an opportunity for startups to engage with and raise funds from their customers, supporters and other members of their community. This article will explore what community rounds are, how they differ from venture capital and the pros and cons of using this funding option.
Community Rounds vs. Venture Capital
Community rounds differ from traditional venture capital funding in several ways. Venture capital typically involves a few large investors providing significant funding in exchange for equity in the company. Community rounds allow startups to raise smaller amounts of funding from a large number of investors. Community rounds also provide an opportunity for startups to engage with and raise funds from their existing customers and community. Venture capital may involve outside investors who are less connected to the startup.
Pros and Cons
Pros:
- Access to a supportive community: A community round can allow startups to tap into their existing network of supporters. These supporters are already invested in the company's success and believe in its mission. A community round can galvanize those supporters by letting them share in the upside.
- Greater flexibility: Community round investors are often more flexible in terms of ownership structure and control than venture capitalists. This allows startups to retain more control over their business and raise money on their own terms.
- Marketing and promotion: Crowdfunding platforms that cater to community rounds often provide marketing and promotion services. These can help startups reach a wider audience and grow their community of supporters.
- Relatively easy fundraising: Venture capital could involve months of cold calls and startup pitches. If a startup has a dedicated community already in place, it's much easier to fundraise. Sometimes it’s as easy as letting them know they can invest.
- Brand ambassadors: Each new investor is now committed to your success.
Cons:
- Limited investment: A Reg CF offering is limited to $5 million in aggregate investments. Regulation A raises are limited to $75 million in aggregate investments. So it might not meet the funding needs of all startups.
- Time-consuming: Launching a community round can be time-consuming and require a lot of effort in terms of marketing and promotion to attract investors if they don’t have an established base.
- Regulatory burdens: Community rounds can take weeks and cost thousands to go live. Once finished, there are ongoing reporting requirements.
Platforms to Launch a Community Round
Several platforms offer community rounds as a funding option for startups, including StartEngine, Wefunder, Republic and SeedInvest. These platforms provide an opportunity for startups to connect with a community of investors and raise funds through an online platform. When considering which platform to use, startups should research the fees and requirements of each platform as well as the types of investors that typically use each platform.
Target Audience
Community rounds are often most effective when using an existing customer or fan base. Community rounds are great for brands with a strong and loyal following on social media, lots of recurring revenue or a strong presence in their local community. These customers already have a sense of brand loyalty and love the product, so allowing them to be brand ambassadors and share in the upside is a win-win.
For startups still looking to build that audience, targeting other audiences within a specific niche can often be an optimal route. Consider attending film festivals, conventions and other film-related events to fundraise for a startup in the film industry, as people there might be highly interested. Using online ads to target these groups also might be optimal.
When to Launch a Community Round
Timing is an important consideration when launching a community round. Startups should have a clear plan in place for how the funds will be used. But planning how the funds will be used is vital for any fundraising.
There are also other timing considerations. For example, if the startup plans to launch a new product, it may want to time the community round to coincide with the launch. This can help generate excitement and support for both the product and the investment round. It can also help lower advertising costs. A startup could drive traffic to the startup’s shop page and have an “Invest now” button at the top of its website. This will drive sales and investments for just the cost of traffic. Because you're already targeting a relevant audience, it's likely to convert well for both.
Investor Relations
When launching a community round, startups should have a plan in place for how they will communicate with investors and keep them updated on the progress of the business. This could include regular email updates, exclusive access to certain events or products or other perks that help investors feel connected to the company. By building strong relationships with investors, startups may be more likely to receive support in the future.
Marketing Plans for a Community Round
Finally, startups should have a clear marketing plan in place for their community round. This may involve leveraging social media, email marketing and other channels to generate interest and support for the funding round. By developing a strong marketing plan, startups can maximize the impact of their community round and reach a wider audience.
Community rounds can be a valuable funding option for startups. They allow startups to engage with their community and raise funds from a wider pool of investors.