There’s been a lot of buzz in the startup world recently about the advantages of — wait for it — not raising venture capital dollars. With bootstrapped successes like MailChimp and LeaseQuery providing a model for ambitious founders to aspire to, more startups are joining a movement encouraging them to build their company without giving anything away.
But some companies can’t get to the scale they want to see without any outside capital at all. In those cases, there are still options beyond VC. Since the JOBS Act began rolling out in 2012, equity crowdfunding — raising money from a large base of investors in an online public offering — has been steadily picking up popularity.
But what if you’ve already raised venture capital? That was the situation GROUNDFLOOR founder and CEO Brian Dally found himself in a few years after raising his traditional seed and Series A rounds ($2.8 million and $5 million, respectively).
The Logistics of Equity Crowdfunding
GROUNDFLOOR is itself a crowdfunding platform, backed up by real estate. They offer unique short-term, high-yield returns in one of the only platforms of its kind.
A few years in, Dally began to see the possibility of simultaneously raising additional capital, and proving that the team truly believed in GROUNDFLOOR’s model. He launched a campaign to use the startup’s own platform to crowdfund the company itself.
In September 2018, GROUNDFLOOR closed its first online public offering after raising $4.2 million from over 2,300 investors. In total, shareholders bought up 14 percent of the company.
Following a 79 percent revenue growth year in 2018, this week, they’ve opened up a second public offering. GROUNDFLOOR hopes to sell another 6 percent, bringing one-fifth of its ownership into the public realm.
That will add up to an additional $3.6 million in funding.
Dally says that while existing GROUNDFLOOR customers are the most apt to take part in the crowdfund, the equity offering also served as customer acquisition for the startup’s products.
“Anybody who’s doing one of these raises should probably be thinking about it in terms of building their customer base, and then trusting that customers who are passionate about your mission and who like your product will ultimately invest in your company.”
“We saw a lot of people who were just testing out the product, just normal customer acquisition, would buy some shares and also start investing in the loans,” he says.
This customer acquisition funnel helps to mitigate some of the expense of advertising the online offering, which can be surprisingly high, according to Dally. GROUNDFLOOR actually had to take on $2 million in debt in 2017 to finance the logistics of the first online offering.
He cautions that trying to acquire investors through marketing can eat up a sizable chunk of the total capital raised.
How to Deal With Thousands of Owners — As A Startup
Dally talks about GROUNDFLOOR’s shareholders in much the same way that public company executives do. Though his team and board are still the ultimate decision-makers on daily business strategy, he’s highly focused on communicating openly with shareholders.
They’ve experimented with different communication methods — webinars, online presentations with Q&A, bi-annual email updates. They’re even looking at holding an in-person shareholder meeting later this year.
“We’ve really been on a journey with this,” he says about their experimentation. He notes that people do seem to know a lot more about startup finance than he had initially expected.
“[Shareholders] asked real questions about valuation and exit. It is not very different from going out there and raising angel capital,” Dally says. “What’s different is you get questions from hundreds of people, if you’re lucky, as opposed to just answering questions from a couple dozen angel investors.”
But remember, they also still have those early investors — the angels and institutional VCs — that need time and attention. Dally says they make sure to keep them updated on all milestones of the crowdfunding campaigns.
Though they weren’t necessarily “concerned” about the crowdfund the first time around, according to Dally, GROUNDFLOOR’s traditional investors were “very skeptical.”
“They asked, how are you going to manage the relationship and will it become too distracting? Once they got past those logistical concerns, their position was one of skepticism that it just wouldn’t amount to much.”
Since the crowdfund hit numbers that catapulted it into the top five percent of online crowdfund offerings of all time, investors have changed their tune.
The Future — Back to VC?
Dally predicts returning to institutional capital for a future growth equity round of $10-$20 million, and he doesn’t think their unique shareholder structure will be an issue for smart venture capitalists.
“At the end of the day what the VCs want and need is an exit, preferably via an IPO or a really attractive acquisition. Our thousands of crowdfunded shareholders, I view that as a strength — that is a retail base that will support the company going public someday.”
For now, they’re using existing capital to complete their 2019 game plan. In 2018, GROUNDFLOOR tested expansions in Washington D.C. and Nashville, but Dally calls them “swings and misses.” However, they simultaneously reached record levels of success with new offerings in Georgia.
In 2019, GROUNDFLOOR will enter three new markets, as of yet undetermined, with the hopes of replicating that Georgia success. By 2020, Dally hopes to be in the position where he’ll need significant growth funding to place small teams in a dozen or two dozen markets.
“As long as institutional investors can see that these public shareholders won’t impede the company in any way, I don’t think it’ll hold us back at all from raising an institutional round,” he says.