- 3 steps to fund capital via equity crowdfunding
- Debt-based crowd-funding works much like a bank loan but the “loan” comes from the crowd.
Notice: Equity crowdfunding is managed by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
The most successful and well-known equity crowdfunding platforms include:
Wefunder attracted many startups, including an online encyclopedia and bionic pancreas. It also has film production. The platform allows any US-based startup to apply for membership. A flat fee of 7.5% is charged if the campaign succeeds.
StartEngine offers a variety of listings, including tech companies and environment-friendly startups. There are also a few CBD entries. Fixed fees are paid by companies along with a dollar percentage and an equity share.
Republic was created by OpenDeal Inc. in 2016 to serve US-based businesses. It includes fintech companies and health and wellness startups. Startups are charged a 6% fee for funds raised. However, this charge is only applicable if the funding goal has been met.
Mainvest was founded in 2018 and focuses on supporting small brick-and mortar businesses. It allows investors to deploy “community capital” in the communities where they live, work, or play. Mainvest charges no upfront fees to launch a campaign. If the raise fails, there is no charge. Other than those funds you raise, “in-network funds” are subject to a 3% fee. Mainvest investors charge a 9% fee for out-of-network funds. Additional fees are possible.
SeedInvest accepts only 1% of all applicants. It hosts a wide range of US startups looking for funding, including robotics, food and beverage, as well as various types of healthcare platforms. Startups pay a 7.5% fee and 5% equity.
Three steps to raise capital using equity crowdfunding
Before you begin, you should determine how much financing you will require, revise your business plan, as well as prepare for the questions that you might face during the due diligence phase.
Your financial statement certification requirements will be determined by the amount you raise. A company officer can certify amounts less than $107,000. Independent review is required for amounts between $107,000 and $535,000 Any amount greater than $535,000 must be independently reviewed and audited.
After you have laid the foundation, it’s time to choose a platform and launch a campaign.
1. Select an equity crowdfunding platform
- You can start by looking for platforms that support similar projects to yours. Chris Rawley, CEO and founder of the agriculture crowdfunding platform Harvest returns, says that many platforms are specialized and have investors who are looking for certain types of investments.
- Learn more about the regulation of crowdfunding platforms by the SEC, including Reg CF and Reg D. Jay Jung, founder and managing partner of Embarc Advisors, says that each of these can have implications for the marketing of the offering and future reporting requirements.
- Ask questions to get the best support possible.
- CEO Jason Frishman, private fundraising company netcapital, advises founders to ask three simple questions during the platform vetting process. What speed can I make my deal available on the platform? How will the platform help me to get attention for my offer?
Warning: Maydan Capital CEO Safdar Alam warns that platforms that fail to do significant due diligence place all the risk on retail investors and offer less support to founders.
After you have chosen the platform that suits your needs, sign up and get ready for the next step: selling your company and yourself.
2. Get ready to pitch your business
Your pitch to potential investors may be written or video depending on the format that the platform prefers. Consider these factors when presenting your pitch to potential investors:
- Use a personal approach. Tell us about yourself and the reasons you started this project. Make it relatable.
- Share the mission. Describe the mission and the effects it will have on society, people, and the entire world.
- Describe what investors get from it.
- Transparency is key when discussing how funds will be used. Be clear about why you need outside funding.
- Rawley warns that platforms asking you to bring in large numbers of investors before you can launch an raise are not recommended. Rawley advises that you also make sure to fully understand any fees and equity splits required by the platform.
3. Promote your campaign
Each platform has a system to run a campaign. Some platforms are rigidly structured while others are more flexible. You should be familiar with the promotion structure of any platform you select.
“The way larger platforms work is that certain events get triggered which then leads your startup being promoted on that platform,” Anna Gudmundson (CEO and founder of the startup, Sensor BioSelf Technology). It’s almost like building a website or blog. It’s unlikely that people will visit your website unless you promote it. Therefore, it is important that founders are familiar with the algorithms and dynamics of the platforms to promote it to crowd investors.
Warning! Many websites will not allow you to access your funds unless you have reached your fundraising goal. The money raised will be returned to investors if it is not.
What happens when you raise the money?
What happens to startups after they have raised equity crowdfunding funds? Others use the funds for the intended purpose and focus on the growth of the company. Some move on to angel investors or banks for their next campaign. Many go back to the original crowdfunding platform for another or third round.
The platform you choose will determine a lot of the next steps.
Alam suggests that you ask Alam about the possibility of involvement after investment if you have chosen a platform that has done its research and isn’t filled with low-quality candidates. Platforms that require regular updates from their founders are more valuable than those that don’t want to have contact with them after investment.
What are the benefits and drawbacks of equity crowdfunding?
Equity crowdfunding, like any other funding method, has its pros and cons for both investors and founders.
Investors and founders both have the greatest benefit of nonaccredited investors being able to participate. This increases the pool potential backers. “Depending on how you structure your traditional raise you might be limited to the number or not able to have any,” Andrea Sager, a lawyer who also owns The Legalpreneur which is a subscription service that provides legal advice for small businesses. Crowdfunding allows for you to let in any number of non-acccredited investors.
Fundraising capital is easier because investors can also invest online. With a click, anyone can invest. Frishman says it is easy to allow someone to invest in your company.
Alam points out the versatility of equity crowdfunding. This approach can be used in conjunction with more traditional fundraising from venture capital companies – the whole round doesn’t need to be done on a crowdfunding platform.
Steven Weinstein, CEO, Seismic Capital, says equity crowdfunding has the advantage of being able to control the rate of the raise. Venture capitalists often require startups to have a quick turnaround time and meet deadlines in order to get the product or service on the market. This is regardless of how much work it takes to refine the offering. Startups can take a patient capital approach with crowdfunding. They will not receive immediate returns but they will be able to gain more substantial and lasting returns as the company grows.
Gudmundson says equity crowdfunding is a great way to get involved in the community and let your customers become part of the company. Your customers are people who understand your product. You’re inviting them to participate in the round as professional investors looking for high-risk/high reward companies to invest in.
It can be time-consuming, and founders may not want to participate in equity crowdfunding. This can lead to a decrease in bottom line. Sager notes that equity crowdfunding can quickly become a distraction from the real business if there isn’t a solid marketing plan.
Jung says that capitalization tables that list hundreds of small investors could scare away larger investors. Many crowdfunding platforms offer workarounds that allow investors to register as one shareholder on the captable.
Frishman points out, however, that equity crowdfunding platforms are a great way to market a company but they don’t guarantee success with capital raises. It is easy to assume that the platform will raise all of the money.
Alam points out another possible weakness that investors and founders should be aware of. Platforms that don’t commit to substantial due diligence and transfer all of this risk onto retail investors unsupported will treat founders and startups very differently from platforms that focus on smaller deals and specialize in certain sectors.
Crowdfunding requires founders to be involved in the campaign. Gudmundson states, “The most important thing is to understand it doesn’t just run.” It is unlikely that a page with your product on the front will raise much money if it is simply created.
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Venture capital is not an option for startups. Equity crowdfunding allows them to raise money from smaller investors.
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