It seems like everyone in the startup or venture capital world has something to say about crowdsourced funding (CSF).

It has become somewhat of a polarizing topic, which is surprising, considering the startup community swiftly united in its disappointment over a controversial proposal to tighten parameters around sophisticated investors (a measure that has since been shelved).

Now, a new debate is brewing as some voices in the community call for more regulation around CSF to protect retail investors, while other startups and leaders in CSF – like Birchal CEO Matt Vitale – are speaking out against the CSF criticism.

There’s an irony in this considering the argument against tightened ramifications for sophisticated investors is virtually the same argument for startups raising capital through CSF. Both stand for broadening access to investment in Australian startups and growing the opportunities for homegrown startups to raise capital on our turf.

Earlier this year, Scalare Partners hosted a virtual catch up and Q&A session with our portfolio founders and leaders within the investment community.

One of the topics that came up was CSF, and there was a resounding agreement from the group that there are a few misconceptions around this form of equity raising that are unfortunately holding startups back from using it as a way to raise capital.

Everyone’s on the same team here: We all want to give startups opportunities to grow and thrive here in Australia, resulting in more exports like Canva, Atlassian and Xero.

As a seasoned leader in the investment community, I’ve seen all sorts of ways CSF can benefit the startup community and how retail investors can safely use CSF platforms to support the startup ecosystem.

Four misconceptions about crowdsourced funding

1. CSF is for small investors

The most common misconception is that CSF is strictly a domain for smaller retail investors, or non-professional investors. It’s true that CSF opens the floor to all types of investors, but that doesn’t mean it’s full of parents, aunties and uncles chipping in A$50 for their family member’s latest venture.

The average dollar value invested on CSF platforms is higher than most would assume – around A$1,600 (US$1,085), according to Judy Anderson-Firth, Group CEO at Euphemia and Board Observer at Birchal. She says they often see A$25,000 to A$50,000 (US$16,947 to US$33,895) checks at Birchal, so there’s actually a high presence of professional investors.

2. Startups that turn to CSF couldn’t raise money from venture capital

Anderson-Firth was one of the panelists at our founders call earlier this year. As a Board Observer for Birchal, she had a lot of useful insights to share on CSF, and she acknowledged there’s this perception in market that CSF is used as a backup plan for startups that couldn’t raise money through venture capital.

But the reality is that startups are raising capital through CSF platforms before, during and after raising money through venture capital.

An example she shared was Zero Co, which raised US$5 million on Birchal before raising another US$6 million from SquarePeg. Some of Australia’s most high-profile investors and funds have backed CSF companies, including: SquarePeg, AirTree, Skip Capital, Euphemia, Antler, NAB Ventures, AfterWork Ventures and Artesian, among others.

One of the reasons CSF has garnered this reputation in Australia is because it’s not quite a mature market here yet. But if we look at the more mature CSF market in the United States, we’ll find a lot more companies that are raising capital through CSF as well as professional ventures, and there’s not as much misconception around it.

In Anderson-Firth’s words, “Turning your customers and everyone in your community into an investor is an incredibly powerful tactic. You can’t buy word-of-mouth growth, but CSF is the closest thing to it.”

3. CSF is only relevant for B2C companies

Despite the fact that B2C startups are more visible on CSF platforms, it’s not limited to B2C startups. B2B startups can be just as, if not more, successful than a B2C, so long as they can tell their story well and build a community of support.

Thriday, a B2B fintech company, raised US$3 million on Birchal even before their pre-product launch, then went on to raise another US$6 million with NAB Ventures. The NAB Ventures team even remarked on the governance arrangements and quality of information that Thriday had readily available off the back of their CSF.

4. CSF investing is high-risk

While it’s true that CSF platforms invite a lot of seed-stage startups that are high-risk, high-reward, CSF investors are often more sophisticated than generally perceived, often adding value and asking insightful questions.

After a company builds a strong community around its product or service, these community members can turn into retail investors, but that doesn’t mean they’re amateur or nonstrategic investors. Actually, they’re people who are passionate about the company’s mission and are often quite knowledgeable in the market and the company.

Crowdsourced funding is an opportunity for startups to unlock potential and expand their investor base. The key to successful CSF is the ability to connect with people through your mission and vision. It’s not just merely a fundraising exercise: it’s a strategic move toward building a community around the product, diversifying funding, and inviting potentially valuable perspectives into the company.

It’s high time the investor and startup community recognize the value (literally) that CSF offers startups and the empowerment it gives to retail investors who want to support early stage startups that they truly believe in.