Crowdfunding has gained traction and enjoys increased interest from entrepreneurs wondering if it’s a viable option for accessing the capital needed to start, build and grow their business. Results, while mixed, are significant for many as crowd investing disrupts the traditional norms for access to capital.
Different Types of Crowdfunding
Equity-based crowdfunding is the focus of this post, defining equity as an ownership trigger. When raising equity-based capital, you are probably selling interest (securities) in your company. Thus, when raising equity-based capital you are squarely under the purview of federal, state and self-regulatory securities agencies.
These agencies have been instrumental in the last few years for creating some disruption in the financing landscape for the startup company asset class. This population of businesses are generally seeking seed to first round capital, which is the hardest to secure. However, with the new provisions, namely Regulation Crowd Funding, general solicitation and Regulation A+ - founders can virtually go "direct to public" to raise the needed capital.
Done right, there's a benefit for both the company and the early investor, who may not have been eligible to invest prior to the rules revisions. This “democratizing” of fundraising allows for people outside of traditional investor and lender groups to join in on early opportunities.
For investment-seekers, crowdfunding can be less risky with smaller dollar investments. This presents an opportunity to invest in multiple businesses while providing for diversification in the startup asset class.
For entrepreneurs, crowdfunding is an alternative to traditional investment capital as it can be the answer to securing the capital required to continue developing the business.
Crowdfunding has thrived under the rewards-based system because it provides a low-cost fundraising method, in part due to the lack of upfront expenses. This low barrier to entry has encouraged many individuals to attempt rewards-based campaigns, without risking the negative financial impact of an unsuccessful raise.
With the adoption of equity-based crowdfunding, entrepreneurs encounter more investor protection regulations then rewards-based, resulting in increased upfront expenses being born by the issuer.
5 Must Do's
When considering an equity-based capital campaign, the following 5 Must Do’s are imperative:
Know Your Options - since passage of the JOBS Act of 2012 the “Entrepreneurs’ Capital Raising Toolkit” has been replenished, adding some pretty interesting tools. Make sure you know how to employ the new securities provisions to raise the capital you need. From private placements to direct public offerings – you can market your capital raise in ways previously unavailable – as long as you can offer a win/win proposition.
Assess Your Required Reach – It’s just math to figure out how many fans you need to touch for a capital campaign to be broad enough to raise the capital you require. However, in this case knowing your numbers is only the first step. What’s more important here is knowing how to reach your fans for the express purpose of converting them to shareholders. Assess how many investors will be required for a fully subscribed offering, build your plan of action, then execute from a place of confidence.
Build Your Budget – Like any other marketing project, your capital campaign should be built based on marketing norms and best practices. However, ensure securities compliance is adhered to throughout the process. Now that you’ve selected your options and assessed the required reach, you’re ready to put costs to the process. Build your budget knowing that all expenses are on you until such time as escrow closes. Building a realistic budget is easier than you think for a capital campaign.
Assemble Your Team – Raising capital can be a full-time job. While capitalization is the paramount responsibility of the CEO, you don’t have the luxury of moving away from building the business for sake of raising capital. So, if this sounds like a circle jerk, in some respects it is. Though, what it means for the rainmaker is that the likelihood of successfully raising capital includes assembling a team to assist with the process. For the most part your internal team needs to include all of your executive management and board members. Outside team members can be elected as required for execution within compliance of the offering.
Execute Your Campaign – Now you can execute your campaign from a position of strength. Though, from execution to close is a long road with many off ramps. A seamless and transparent system with ease of use should be employed to manage the process. Management must ensure consistent monitoring of all the moving parts is strictly adhered to making changes and adjustments as required. Customer or investor services is very important here. Throughout the campaign you are expected to connect, engage, educate, negotiate, and close. Each touch point is another opportunity to move from interested to fan to investor than shareholder and ultimately evangelist.
Crowdfunding is more than just raising money for those companies that cannot get funding from traditional sources; it's a viable alternative - if, the crowd sees merit in the offer.
The additional benefit for founders is that crowdfunding forces companies to be organized in their marketing activities by leveraging social media, public relations, a website presence, list creation, videos and the delivery of a multitude of passionate communications. It forces messaging to be clear, concise and easily understood by the intended audience to get an immediate call to action. Marketing exposure is what it's all about, whether selling your products and services or securities in your business. Crowdfunding could be a huge internal win/win!