CASE Forum

Wave: Is the Time Right for Crowd Equity?

A startup needs a lot more capital if it hopes to pick up the pace of growth. The founders could go back to their business angels, seek VC funds or try something new: a crowd equity platform. Is the time right for financing through the crowd?

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Manuel de la Esperanza was headed to a meeting with the board of Wave, the company he founded a few years earlier. Although he was convinced the board would be pleased with the company's progress, he was going to have to explain why he needed a new round of funding just two months after getting an injection of 500,000 euros from business angels. How would the board react not only to another request for funds but to the way he envisioned that Wave would raise those funds?

A Geolocation Service
Wave is a mobile app that makes it possible to contact other people in real time and see their location. Manuel and a college friend, Luis Gelado, first launched the app in Brazil. The response surpassed expectations, growing at a rate of 60,000 users a week, amounting to 300,000 monthly active users in the first year. More than 80 percent were repeat users, mainly in emerging markets. Encouraged by this promising growth potential, they began showcasing their app at popular startup events around the world.

When it came to financing, the entrepreneurs initially relied on family and friends to raise 375,000 euros to get their venture started. Once they had demonstrated the viability of their idea, they subsequently sought outside investors. They managed to raise 850,000 euros from business angels, family offices and a U.S. startup accelerator, which they supplemented a year later with the additional injection of 500,000 euros.

In this manner, they hoped to keep raising capital in small increments. However, to accelerate and sustain long-term growth, it soon became apparent that more capital was needed. Manuel considered his options.

Three Options on the Table

First, he could go back to his business angels, many of whom had more money and contacts with other investors. However, he wondered how long he could keep asking them for more.

Second, he could go after larger venture capital funds, which were more used to making larger investments. However, he worried about the diluting effect this would have, and whether VCs would pressure him and Wave to hit more aggressive targets according to their time frame and agendas.

A third option presented itself when Manuel received a call from the CEO of a crowd equity platform. As with crowdlending and crowdfunding, crowd equity involves hundreds or thousands of different people (the crowd) each giving relatively small amounts of money, which are then pooled to provide the finance for a common business project. But there is a key difference. With crowdlending, people borrow money from the crowd, which they later pay back. With crowdfunding, people give money to support a cause, often with no expectation of getting anything back. With crowd equity, on the other hand, the crowd are investors who ultimately own a stake in the company, sharing the risks as well as the rewards. It is an aggregation of many small investors, rather than a few big ones. Did this new and increasingly popular form of financing represent a viable alternative?

Follow the Crowd?
Generally, the crowd concept has been limited to certain types of businesses -- gyms, restaurants, one-off artistic productions, social initiatives -- which don't have that much in common with a growth-focused business like Wave. Moreover, going this route entailed the extra cost and effort of running a crowd equity campaign. Such campaigns required revealing sensitive corporate data to the public that had so far remained confidential.

In addition, the average amounts raised through other crowd equity platforms tended to be less than the amount of capital Wave needed for the future. Perhaps the crowd equity option could be undertaken in combination with the further backing of a business angel or with a major VC as part of the deal.

As Manuel headed to his board meeting, he pondered the different options. How would he explain the need for additional funding just two months after the last round? Was now the right time to go for crowd equity? Or was it better to stick with the more traditional options of business angels and VCs? He also tried to see it from potential investors' point of view: what were the pros and cons of crowd equity for them, and how could he mitigate the concerns they may have of investing through such a platform?

The case study "Riding the Wave: Financing Ventures Through Crowd Equity" (E-187-E), by IESE's Thomas Klueter and Amparo de San José, director of the IESE Business Angels Network, is available from IESE Publishing at


November 22, 2017 14:18:03