Treat your fans well

Substack and Clue have both announced that they are raising capital from their users (also known as equity crowdfunding).

Historically raising equity crowdfunding after having raised venture capital has been a sign that the company isn’t doing well enough to able to raise from traditional investors.

I think it can make sense for community-driven services like Substack and Clue to raise capital from its users. But as always there are a bunch of caveats. For fundraising from a community it, in my mind, boils down to “treat your fans well”. Especially when the fans might be neither rich nor financially sophisticated.

Substack is raising $5 million at a $585 million valuation (extending its Series B round from 2021). This seems like a stretch, given what has happened with the valuation of low revenue/high valuation Series B companies since 2021 (Substack did about $11 million in gross revenue in 2021, and my guess is that it likely did less than $30 million in 2022). A company should reveal current high level financial information like revenue, profit/loss etcetera when raising capital. Especially when it must be assumed that old investors have access to that information.

Clue has only put out initial information that it will do an equity crowdfunding round, so the full terms are not known yet. One thing that seems to better than in the Substack raise is that crowdfunding investors will be joining a March 2023 round led by USV and Balderton. It is much fairer for small, new investors to invest a current valuation (if done at arms’ length) than a pre-crash valuation from 2021.

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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