8 Reasons Early-Stage VCs Love Community Ownership
The community-based world of Web3 presents a new opportunity for founders building game-changing companies. At Fairmint, we believe in the power of community so much that we built our mission around it. By giving a company’s community — the early adopters, contractors, partners, and customers — access to the equity ownership, founders are incentivizing all stakeholders to contribute to the company’s success.
But what about traditional venture capitalists? How does this new structure impact them?
The emergence of community ownership has quite a few benefits for VCs. In the process of raising over $7M via community ownership ourselves, we’ve gotten enthusiastic feedback from investors of all sizes.
Here are 8 reasons why VCs love community ownership:
1. All the options stay open.
Companies that choose to raise funding from their community leave all the options on the table. Founders can allocate a certain percentage of their equity to their community but leave another portion available for more traditional rounds. They also are able to IPO or engage in M&A activity the same way a VC-backed company would.
2. You get a real signal on how a company’s doing.
In early-stage investing, it’s often difficult to truly understand the company’s current state of development and its potential. Community ownership gives a clear view of how a company is viewed by real people. Individuals — users, employees, business partners — don’t invest frivolously. If community members are putting their own money into the company, it means there’s a high level of conviction regarding the value that is being provided.
3. There’s longer runway for businesses to thrive.
When a VC invests in a company, he or she wants to ensure that it puts those funds to work to achieve significant milestones. When a startup meets its goals, they’re likely to reach a higher valuation in the next round. By letting a company’s community invest alongside them, VCs have help giving the business the support and runway it needs to be valued at a higher price later.
4. The chicken-and-egg problem of network effects is solved.
In many early-stage companies — and particularly in marketplaces — there is a chicken-and-egg problem: you need supply to build demand, and you need demand to increase supply. Community ownership provides fuel that can help to overcome this problem, as it provides vested financial interest within the user community. This gives early believers a share in the upside they create with their contributions, inspiring them to bring others into the company’s orbit. Bootstrapping these network effects creates a huge competitive advantage that is hard to beat.
5. There’s less customer churn.
Because community ownership aligns users and the company over the long term, there is greater likelihood of receiving useful feedback that results in lower churn rates. Having those early customers be a bit more patient with the inevitable bugs and set backs new products have makes retention much easier.
6. It’s faster to markup your investment.
The Rolling SAFE, the contract which underpins community ownership offerings, provides an FMV at all times since price is guided by a more fluid market of supply-and-demand than that seen with traditional financing rounds. This lets a VC easily markup their investment whenever needed, without needing to wait for a follow-up round.
7. The window of opportunity is wider.
When a company is making progress, hitting milestones and emerging as a market leader, investors can increase their ownership without needing to jump through any hoops. Rather than waiting for the next round and then competing to get in, they can invest in the community’s allocation at any time.
8. Companies are stronger, fairer, and more transparent.
The great companies that emerge this decade won’t be built by stepping on the shoulders of a mass of faceless consumers. They’ll be built with expanding networks of connected individuals — in other words, with a community.
As so many have found in the past decade, though, it’s much easier to say you’re building a community-based business than actually doing it. Finding the right ways to align founders, users, investors, employees, and a multitude of other stakeholders over the long term is a giant challenge.
Community ownership is one of the most powerful levers a founder has. Companies sharing ownership with their community will gather more feedback, have lower marketing costs, create a stronger brand, and quite simply build a stronger company.
All that is music to the ears of professional investors who have a fiduciary duty to maximize returns to their shareholders 🎶 💸
