Equity Crowdfunding: Is it Right for Your Business?
Though still not fully phased in, the Jumpstart Our Business Startups Act (JOBS Act) which Congress passed in January 2012, kicked off a wave of business and investor interest in (and platforms to facilitate) equity crowdfunding. Geri Stengel, Founder and President of Ventureneer shared her insights and pointers on deciding whether raising funds through equity crowdfunding is right for you as well as what makes for a successful campaign.
Background: Equity Crowdfunding Versus Alternative Methods of Startup Funding
Before diving into the mechanics and key considerations, here’s some perspective on equity crowdfunding versus other avenues of startup funding. The venture capital funding market totals $48 billion annually and the angel investing market accounts for $24 billion (with a 19% success rate at raising funds).
In comparison, the crowdfunding market totals $.5B (and has a $24% success rate at raising funds). Angels are using crowdfunding platforms for increased and higher quality deal flow while VCs are investing in platforms and corporate acquirers are utilizing them to identify potential acquisition targets. Unsurprisingly, San Francisco/Silicon Valley is the best startup market for crowdfunding. New York is the number two market.
Equity Crowdfunding Regulations
Here’s what the regulatory picture looks like at the federal level:
- Title 2 of the JOBS Act (506c) allows entrepreneurs and startups to raise funds from accredited investors via marketing securities as well as privately from a limited number of non-accredited investors.
- Implementation of the Act’s Title 3 provision yet to be finalized, but it would allow emerging companies to raise funds from everyone by legalizing “funding portals” on the condition they register with the SEC.
Misconceptions around equity crowdfunding:
- It’s difficult to verify potential investors’ accreditation status.
Reality: Your lawyer, accountant, or certified investment professional such as a broker-dealer can do it. Some crowdfunding platforms will also do this for you.
- Managing investors is complicated.
Reality: The lead investor typically sets terms for other investors so founders don’t have to use different term sheets for different investors. There are other workarounds to avoid having to manage multiple small investors. You could create a special purpose vehicle (SPV) for all investors or an SPV that you roll-up only small investors into. You could also issue non-voting stock to investors.
- Financial reporting is complicated.
Reality: Reporting doesn’t have to be onerous; it can be done quarterly and via QuickBooks—but it does have to be done right. Your reporting responsibilities do get stepped up a notch once you have investors so make sure that you’re doing it right from the outset. If you don’t have the resources to manage this reporting in-house, outsourcing this function (to a firm like EGFS!), can be a cost-effective option.
- Equity crowdfunding is expensive.
Reality: There are platform and marketing fees when you fundraise this way, but using a platform allows you to focus your efforts. You can also raise your ask to cover platform expenses.
- VCs and angels are biased against crowdfunding.
Reality: In addition to increasingly looking to platforms as a source of deal flow, VCs invested $240 million in crowdfunding platforms in 2014.
Should you raise startup funding via crowdfunding?
Despite perceptions, equity crowdfunding is not an easier route to funding versus other means. It’s also not necessarily faster. It takes four to six months on average to raise funds via equity crowdfunding. Key considerations include some of the same ones you’d have for any type of startup fundraising. Namely:
- #1 Do you have a large market?
- #2 Does your product solves a major customer pain point? Nice to have isn’t good enough. You need to have a defensible competitive advantage, whether that be first mover advantage, distinctive IP, or something else.
- #3 What’s your exit strategy?
- #4 Do you have a great team?
Once you’ve answered these questions for yourself, keep in mind that one size doesn’t fit all. Consider all your options including your sector, stage, how hands-on you want to be as well as platform fee structure in deciding which is best for your business and situation.
Tips for a successful crowdfunding campaign
- Don’t use buzzwords. — Clearly explain your distinctive value proposition.
- Highlight your team. — At the early stages, people invest in the team more than the idea,
- Create a compelling video. — Keep it to a maximum of 2-3 minutes.
- Emphasize traction. — Call out media mentions, partners, and any new investors
- Reach out often via multiple media. — It’s rare for campaigns to go viral. Increase your visibility by writing articles, conducting email marketing campaigns, and utilizing social media. Email, phone, and in person outreach are still the most important methods for closing the deal.
- Get organized. — Don’t wait until you launch your campaign to start experimenting with a new social media platform.
- Showing momentum is hugely important. — Get advance commitments before you start your online campaign.
Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.