Raising funds for your first start-up can be a daunting process. Banks won’t lend you money because your company is “too risky”, angel investors are like hunting for gold dust, and VC’s probably aren’t an initial option. So is crowdfunding the answer? The rising popularity of platforms like Kickstarter and Indiegogo shows the benefits of giving the power to the people. However equity crowdfunding gives shares to the very market that you serve.
Raising funds for your first start-up can be a daunting process. Banks won’t lend you money because your company is “too risky”, angel investors are like hunting for gold dust, and VC’s probably aren’t an initial option. So is crowdfunding the answer? The rising popularity of platforms like Kickstarter and Indiegogo shows the benefits of giving the power to the people. However equity crowdfunding gives shares to the very market that you serve.
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What is equity crowdfunding?
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With equity crowdfunding, you can sell shares of your business to just about anyone in exchange for equity in your business. And no, it's not just for tech companies. Equity crowdfunding, also known as “crowd-investing or investment crowdfunding”, lets startups and private businesses raise capital from the public (the crowd). It allows everyday people to invest in your business and in exchange, you offer them equity in your business (like Shark Tank and Dragon’s Den). Each investor is entitled to a stake in your company proportional to their investment - and these days, technology is democratising access to becoming an armchair investor.
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This type of fundraising has always existed, but until recently you could only sell shares of your business to accredited investors—fairly wealthy individuals who met specific net worth and income criteria. Now, your cousin, your neighbour, or almost any member of the public can buy shares as a non-accredited investor, provided you set your business up properly.
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The Difference Between Crowdfunding And Equity Crowdfunding
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Crowdfunding refers to raising money from the public, primarily through online forums, social media, and crowdfunding websites like Kickstarter to finance a new project or venture. In return, these people might get a reward, like a copy of what’s being produced for example, or nothing at all. Project creators on Kickstarter and similar platforms maintain 100% ownership of their work and business.
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With equity crowdfunding, the crowd can fund your business or project and in exchange for relatively small amounts of cash, public investors get a proportionate slice of equity in your business venture. Navigating the equity crowdfunding landscape can be pretty confusing. Typically, securities and those who offer securities to the public must be registered and subject to regulation. Securities regulation protects investors by ensuring that investors obtain the information they need to make an informed decision, and that issuers are held accountable for any misrepresentations or fraud.
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However equity crowdfunding is considered an anomaly. In recent years, regulatory bodies have allowed registered platforms to act as an intermediary between crowdfunding issuers and your investors. But that means you can only raise financing this way by signing up for a registered equity crowdfunding platform in your country or region.
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When it comes to picking a platform - it’s best to do your research to find the right fit for your business. It will depend on the type of campaign you’re after, how many investors you want, and whether or not you decide to use more than one platform. While the structure of your offer, including the equity percentage and the type of securities you will sell, is a bit complicated and best done with the help of your lawyer, the process of actually creating a campaign is fairly straightforward.
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After signing up to an accredited platform, you’ll need to prepare a crowdfunding pitch. This is the most time-consuming part of the application process and may include frequent iterations to keep interest going. You’ll have to determine what the equity stake is and the share price in your pitch, too. You'll also have to submit to background checks by the platform and provide essential company information to prospective investors. That includes financial statements and forecasts, a credible business plan, and so on.
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When you’ve either hit your financing target or when the campaign ends, the platform will perform some final vetting before releasing funds to your business. In exchange for the money, investors get a share of your business. These shares give investors voting rights in your company. Since these platforms are handling the legal compliance on your behalf, they make their money through fees. This can be a percentage of the amount raised plus transaction fees, or maybe even equity. This varies from platform to platform. The perks of having several investors with a stake in your business is they’ll promote your business like it’s their own - because it is. Nothing works best like organic word of mouth!
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Is Equity Crowdfunding Right For You?
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Before you pursue equity crowdfunding, it's important to know that it's not free. Although it can also have incredible benefits for your business, mounting a campaign does cost money. Some of the costs may include: legal and compliance fees, handling fees, business plan fees and any marketing and advertising. So really, this part of the campaign is almost like running and business in and of itself.
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Contrary to popular belief, equity crowdfunding isn’t just for tech companies. It’s for anyone with a viable business plan. As long as you're willing to give up some percentage of ownership in your business, your hobby, your wellness brand, and even your engineering company can qualify to raise money this way. If you've got a product or service that tells a great story that regular consumers can get behind, understand, and endorse, then you've won half the battle.
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Risks And Rewards
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The main benefit of equity crowdfunding is that you can raise large amounts of money on crowdfunding platforms relatively quickly. Once you and your lawyer have structured your share offering and you've chosen a platform, you could go from underfunded to fully financed in a matter of weeks. Normally, you’d have to approach each investor individually and pitch them on your idea, which can take years!
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The other key benefit is that you retain company control, rather than having an investor who may want to be on your board and have a say in your company’s decisions. And since investors are part owners with a stake in the business’ success, you have a team of dedicated brand advocates from the start. This means a team of people who are sharing your brand with their networks and raising awareness for your products, and building brand loyalty in the process.
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The main risk with equity crowdfunding is that you may end up with lower-quality investments than you would have if you had raised financing from more conventional sources, like venture capitalists or angel investors. Since the general public is less experienced when it comes to business and investing and they don’t typically meet the net worth of accredited investors, you won’t benefit from huge sums of capital or the business advice that many investors often provide.
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Finally, you’ll want to consider how you would manage having so many investors with a stake in your business. It's important to develop a clear communication strategy for staying in touch with them and empowering them to continue to support your brand, even though it could be years before they see any financial returns.
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Checklist Before You Start
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Your start-up is fundable if you’ve already achieved something measurable. It’s best to already have a working prototype or minimum viable product that has been beta tested and gathered some primary insights and data. This often requires some personal investment, and investors will want to see that you have skin in the game.
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You should also have a great team with the right skills to grow the business, some advisors or people who can offer you insights for what you need to succeed, and you should have a clear business plan to demonstrate and communicate to people where the money is going. It can also be beneficial to have some intellectual property such as patents, trademarks or at the very least domain names that have been secured for your business, so that you can hit the ground running.
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Equity crowdfunding is, by its very nature, extremely transparent. The crowd gets to know everything about your business and comment on it. That means you have to be comfortable sharing really specific details about how your company operates. You also need to be in tip-top shape financially and legally so you can demonstrate to your potential investors that you have a strong company that operates ethically and has a clear business plan. As a bonus, being organised in this way will have plenty of other benefits for your business: it may protect you from legal hassles in the future and could open doors for other types of financing as well.
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So if you’re on the hunt for your next round of investment, consider turning to the very market that you serve.
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