Which would you prefer: a handful of big-check investors or an army of small-check investors?
Depending on your circumstances, you may not have a choice. In Q1 2022, venture funding dropped 19% quarter-over-quarter (QoQ), its first QoQ decline since early 2020. The looming threat of recession has made VCs tighten their belts, meaning reduced valuations and fewer big checks to go around.
It’s not all bad news though. Not every company needs a big check, and given the control and equity you give up when you get one, you may not actually want a big check.
Even better, there are now more credible small-check funding options than ever.
The three main options are crowdfunding, pitching angel investors, and using Roll Up Vehicles (RUVs). Crowdfunding lets you accept funds from anyone and everyone (within certain limits). Pitching angel investors gives you 1:1 meetings with powerful, experienced people in your niche. RUVs accept investments only from accredited investors. There are pros and cons to all approaches, but before we dive into the nuances, let’s look into what makes small-check investing so powerful.
Why small checks?
The difference between big-check and small-check investors starts with why each invests.
For a big-check investor (think giant VC firm), your company is one of dozens in their portfolio. Most VCs take a fairly hands-off approach, occasionally giving advice and passively waiting for a return. They invest in you because of numbers, at a valuation they control.
On the other hand, small-check investors are raving fans. They’re the people who’ve been following your company’s growth, challenges, gambles, and successes. When a funding round opens, they’re excited to jump in. They’ll hustle for you, helping with referrals, intros, recruiting, marketing, sales, and more. They’re utility players, Swiss Army knives: people with a vested interest in your success and the resources to fuel it.
I’ve seen it firsthand. LawTrades has small-check investors from Amazon, Meta, Google, and Netflix (among others). Having them expands our network and influence in ways we’d never get from a small group of big-check VCs.
So, which should you choose: crowdfunding, angel investors, or an RUV?
- Wide reach. Crowdfunding sites put a limit on how much each individual investor can spend, but there’s no limit on how many people can invest in your company. In terms of raw reach, nothing beats crowdfunding.
- Builds community. It’s a natural step to turn 500,000 micro-investors into a social media/newsletter following. The more you brew that community, the stronger a base of support you get.
- High funding potential. 500,000 investors isn’t the norm, but it’s not unheard of. Even if you got 10% of that, 50,000 investors coming in at an average of $100 would net you $5 million.
- Expensive. If you go the crowdfunding route, you have to get audited by an accounting firm and pay for it out of pocket. The platform also takes a sizable chunk (about 7%) of your net investments, plus 1% of your securities. If you’re down to your last two-three months of payroll, it might not be affordable.
- Strict rules. Platforms have to be very careful when engaging non-accredited individuals. It can’t smack of exploitation at all.
- Less respected by VCs. True or not, crowdfunding can sometimes look like a desperate move after bigger investors have passed.
Best for: Consumer products/B2C businesses whose public following has a direct impact on their success.
2. Pitching angel investors
- Builds your network. Even if they don’t invest, getting quality face time with influential people can only pay dividends down the road.
- Hand-select value-add investors. In the ideal scenario, you find angel investors who have meaningful connections in your niche, and meaningful experience to guide your growth.
- Manual (not scalable). You can’t rely forever on in-depth meetings with new potential angels. It’s very time-consuming. You can afford to spend that time early in your company’s lifecycle—less so as you scale.
- Limited in reach. Angel pitches are 1:1 meetings. Ten successful meetings are great from a financial perspective, but compared to crowdfunding and RUVs, they have limited impact from an audience perspective.
Best for: B2B, SaaS, and tech companies whose main hurdle is funding early building and marketing experiments for their products.
- Fast, inexpensive, scalable. The main things you need for a strong RUV are a good pitch deck, a well-produced video presentation, and the time to do a few live pitches/demos. The same way software is almost infinitely scalable, making one great video and distributing it to hundreds of investors is infinitely more scalable than taking hundreds of 1:1 meetings.
- Respected by VCs. Because they’re open only to accredited investors, RUVs don’t have the same amateurism stigma that crowdfunding does.
- Limited to 250 investors. For some companies, 250 is a great midpoint between crowdfunding’s limitless reach and angel investing’s severely limited reach. But depending on your product/positioning, you might benefit from more.
- Accredited investors only. Meaning, not all your passionate Twitter followers can pitch in if they want to. But universal accreditation adds credibility to your cap table.
Best for: Assembling a tight community of value-add investors in B2B, SaaS, tech, and beyond.
I’m a little biased because our RUV worked out well, but I think RUVs strike a really powerful balance between the reach of crowdfunding and the influence of angel investing. A successful RUV lets you create your own leverage: build in public, be transparent about your financials, give consistent updates, and let your cap table’s natural influence do the rest.
There is no shortage of options for companies looking to raise in a shaky market climate. You just have to think bigger than only the traditional routes.