Following on from our previous blog which captures some of the crowdfunding platforms that are available, here we now ask the question is equity crowdfunding right for you?
It’s no secret that equity crowdfunding has become a popular way to raise funds for a variety of projects in recent years, and it does not appear to be slowing down anytime soon. There are numerous reasons why equity crowdfunding is such an attractive method of raising funds when we look at first glance:
- Perhaps most importantly, it enables you to reach a large number of potential investors who would otherwise be unaware of your business.
- It contributes to the creation of buzz and momentum surrounding your company, which can attract additional investors and increase its chances of success and your general profile.
- Then, it can help you build a community of supporters who will act as brand advocates and spread the word about your business.
So, when you look at these 3 points alone, if you’re looking for a different and beneficial way to raise funds, equity crowdfunding may look to be an exciting and interesting solution and allow you to grab some enticing publicity by being in the public limelight as you do it!
Equity Crowdfunding: Is it seen as the easier option?
Absolutely! To many founders they seem like an incredibly easy answer, with numerous spotlight examples of start-ups always overfunding, campaigns that get funded within hours of opening and all the major PR & buzz that surrounds successful campaigns. Why wouldn’t you?
So in the life of a lot of founders, at some point, most have taken a look at their websites full of promises to consider which would be the best to answer their fundraising goals and prayers.
Furthermore, the appeal stems from the fact that equity crowdfunding attracts a diverse range of investor types from the general public who aren’t professional investors but are either brand advocates or simply want to make a small-scale investment from as little as £10 to have a say in their future and grab a piece of the action!
Alongside the public, the promise of Angel investors with larger cheque books and deeper pockets that are also looking for deal flow on the equity crowdfunding platforms is very attractive. It’s an easy place to see “what’s hot & whats not” and literally follow the crowd.
Even so, despite the very attractive positives, there are some other aspects of equity crowdfunding that must be thoroughly considered before you set your sights firmly on putting your company’s fundraising efforts in huge bright lights:
What you must consider before jumping on the equity crowdfunding bandwagon
If you’re thinking about starting an equity crowdfunding campaign, keep in mind that it may only generate less than 40% of your round at most; then decide if it’s truly worth it in terms of time, cost, and overall value; otherwise, it’s a significant effort taken away from your own direct targeting of investors.
If you’re comfortable with that, then this path may be a golden ticket to success, but ensure you have properly evaluated the other considerations:
- It is not free! In fact it can be quite expensive and consume a precious amount of the actual funds you raise!
- Not everyone will be eligible because of the compliance process.
- The rate varies platform to platform. Seedrs boast levels of 90% success in recent times but others maybe nearer 50%.
- These success rates should be taken with a pinch of salt given the way that people will either secure a large % prior in advance so there is much less chance of it failing or they may flex their raise targets to appear like they are instantly overfunding.
- You will need to secure at least 30% as a minimum on some of them, sometimes even more prior, but realistically to stack the odds in your favour for a successful campaign you should be targeting 70-80%+.
- It could generate a significant cap table if not completed through a consolidated nominee account.
- The number of raises available each period is limited.
- It takes a significant amount of time pre & during the campaign.
- A significant marketing effort is required to be effective.
- A poor campaign may result in the loss of key investors which could be a significant setback. No one wants to be associated with a company failing in public.
- If you have publicly promoted it to your network and it fails, you may face negative consequences or a loss of reputation.
- A crowdfunded campaign, is only a small part of your wider fundraise and isn’t the sole campaign.
If you’re still curious about the process then let’s understand the process.
How does equity crowdfunding work?
In very simple terms this is how crowdfunding usually works:
- Assuming you meet their criteria, have enough pre-secured funding, have gone through registration, compliance and on-boarding process.
- The business creates a campaign on the platform of choice, then:
- They will lay out the terms of the investment (raise amount & valuation)
- You can then provide various information for prospective investors to use to assess your campaign such as pitch materials, videos, etc
- The campaign captures any pre-secured funding for the round
- It tracks the progress publicly for all to see.
- It also allows you to provide periodic updates as to the campaigns progress and good news stories during that period.
- Campaigns can be run over a period of 2 weeks to 2 months, but usually around 30 days.
- The business controls & sets the terms of the amount being raised and the equity on offer.
We hope you found this useful in your quest to understand more about equity crowdfunding.
