Industry Analysis - August 17, 2022

Does Past Funding Matter in Online Startup Investing?

The money startups raise in funding rounds enables founders to grow their company and make their ideas and goals a reality. Raising capital is also a way to expand a startup’s network, either with investors, customers, or advisors. There are multiple methods for raising capital, such as from family and friends, venture capitalists, angel investors, or through crowdfunding. 

Going through multiple rounds of funding not only helps startups bring in more cash but also helps the founders and team see through the lens of investors. Entrepreneurs can understand the criteria investors look for when deciding to invest, and it gives them a clearer view on how their company has been performing. 

But how much does prior funding matter in the online startup investing space? Founders spend a lot of planning, effort, and time on getting funds. If they have already received capital in the past, do they have an easier time raising capital in the online private markets?

All equity crowdfunded companies between Jan. 1 2020 and Jun. 30 2022.

According to our data, companies with prior funding rounds did not perform better than companies without prior funding. In fact, it shows the opposite. Companies without prior funding were able to raise more money on their crowdfunding rounds compared to companies that had prior funding. However, if we focus only on startups with past funding, there is a positive correlation between having large amounts of past funding and raising large amounts in online rounds.

It’s somewhat surprising that startups with no prior funding outperformed their non-bootstrapped fellows. Conventional investing wisdom says that having past funding will increase the likelihood of future success since it indicates that a founder has a solid network and knows what they are doing. However, there’s an important fallacy in that wisdom — it doesn’t leave room for founders who don’t have wealthy networks to draw from. We’ve seen how online startup investing has helped to conquer biases that seem to pervade traditional venture capital. In 2021, startups with female founders received nearly 20% of total funding, and startups with minority founders received more than 30%. (Note: both of those statistics apply only to Regulation Crowdfunding raises.) It’s clear that retail investors aren’t approaching online startup investing in the same way as venture capitalists have. And that new perspective seems to hold true for the question of past funding as well.

However, our data shows that startup investors may not want to completely ignore a company’s past funding. It’s just a question of when to start paying attention. If a startup has received only a few thousand in prior funding, then other aspects of the company — its team, product, market potential — should remain the focus. But if a startup has gotten $1 million or more in past funding, investors may want to take note. That level of funding shows significant investor confidence in the past. If the startup checks other boxes and has strong prior funding, it becomes an even more attractive investment opportunity.

Note: All data on online startup investing used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.

About: Yasmin Sharbaf

Yasmin is passionate about the intersection of business, art, and science. Prior to KingsCrowd, Yasmin worked on a cryptocurrency investing research project for Wellesley College Investment Office where she assessed the risks and rewards for university endowment investment into cryptocurrency. She has also previously worked in a neuroscience lab studying language and memory of songbirds. Yasmin’s dream is to make investing and financial education accessible to everyone. In her free time, Yasmin enjoys going on adventures, learning new languages, and exploring different cultures. Yasmin studied Neuroscience and Studio Art at Wellesley College.

View more articles by Yasmin

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