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In the past few years, the way startups raise money has changed a lot. One of the biggest new trends is community rounds. This guide aims to explain what community rounds are, how they're different from traditional venture capital, the pros and cons of using this option, and how to execute a successful community round
A community round is when a startup lets thousands of its customers, users, fans and friends invest alongside VCs and angel investors OR completely instead of VCs and high networth investors. They allow companies to raise capital from thousands of investors while keeping a simple cap table structure through an SPV. Regulatory changes in March 2021 (regulation crowdfunding) have made it easier for companies to run community rounds.
While both community rounds and venture capital are viable funding options for startups, they’re quite different:
In community rounds, startups raise small sums from thousands of customers, supporters, fans etc
with venture capital, companies typically raise larger sums from a few VC funds or wealthy angel investors. VCs often demand better terms, board seats, and liquidation preferences, which can be more demanding for the company.
A Community Round lets your superfans invest in your company through a single Special Purpose Vehicle on your captable. There’s no limit on how many people can invest. People can invest as little as $100 and don't need to be accredited. In a syndicate, there's a limit on the number of investors the investment round pool can take. Also, a syndicate requires you to be an accredited investor.
Many high-growth startups like Mercury, Replit, Doorvest, & Levels, have used both funding options to raise millions of dollars. If you can bring on a credible institution as a lead investor, it will make your fundraising a bit easier. If you can't get a big-name investor, try to find someone who knows your industry well or has a good track record in investing. This can help build trust with other potential investors
Community rounds come with various advantages and disadvantages
Pros of community rounds