5 Equity Crowdfunding MisconceptionsJan 14, 2021
In order to build a profitable business, sometimes you need to find outside sources of capital to give the company a boost in the right direction. When you do decide to raise capital you might find the range of options available quite overwhelming. It can be difficult to work out which one is best for your company and it doesn’t help that there are also a lot of misconceptions surrounding them.
Equity crowdfunding can be a great resource for entrepreneurs to get that capital but we know from speaking to hundreds of businesses considering this option that there are a lot of misunderstandings about what it means, how it works and what you need to do in order for it to be successful.
That’s why I’ve put pen to paper, or finger to keyboard, to help clear up the 5 most frequently encountered equity crowdfunding misconceptions.
1. ‘I can give people my product in return for their investment’
Equity crowdfunding is not the same as rewards-based crowdfunding where you can give investors your products or service in exchange for investment. Equity-based crowdfunding campaigns must be for registered, limited liability businesses that want to offer shares in their companies in exchange for investment. It is raising capital from the crowd through the sale of part of your company. Equity crowdfunding could give investors a return on their investment in the future, it gives them skin in the game.
You’ll often find rewards, or project-based campaigns on crowdfunding platforms like Kickstarter, Indiegogo or Crowdfunder that specialise in the idea of product or services for investment. Equity crowdfunding campaigns take place on platforms like Seedrs and Crowdcube, who provide the FCA-authorised mechanism to collect investments including all the legal and administrative requirements such as issuing of the actual shares. We are partnered with both platforms.
Although you’ll often see rewards or incentives as part of an equity crowdfunding campaign to entice a range of investor sizes, for example, ‘for every £1000, our investors will receive a lifetime discount of 10%’, this is merely used as a tool to encourage investors to increase their amount and is in addition to receiving shares, not instead of. Rewards are a nice to have, not a need to have.
2. ‘Crowdfunding is for charity’
Crowdfunding is defined as the practice of funding a project or venture by raising money from a large number of people who each contribute an amount, typically via an online platform. Some of the most high profile crowdfunds have been for charity, remember Captain Tom? So it’s not surprising that people assume all crowdfunding is just giving donations and getting nothing back in return. In fact, this was one of my first thoughts when learning about crowdfunding. Equity crowdfunding on the other hand, is really all about a person investing in the future – both the future of your business and their future in terms of what return they could get on their investment. You're not asking for charity, donations, or favours. Instead, you're offering these investors the opportunity to be part of your exciting and promising future.
3. ‘I’ll find all of my investors on the platform’
The crowd is not just out there waiting. It often surprises clients to hear that you really need to do the groundwork with your own network to secure a high % of the minimum target before launching any successful equity crowdfunding campaign. This isn’t implying that when you enter our programme you need £120k in the bank from your wealthy neighbour. However, a large portion of the lead up to any successful campaign will include you carrying out a carefully constructed comms plan to ensure you pull the right levers, at the right time, with the right people from your crowd. Securing those soft commitments in the early stages of a campaign is vital for it to succeed.
The platform should only really be viewed as the tool via which to collect your investments and a way to access a new pool of investors you wouldn’t have otherwise had access to. On average, you’re likely to get roughly 20/25% of your minimum target from ‘anonymous investors’, or what we call ‘friends you haven’t met yet’ e.g.: investors who find your campaign online, people who don’t know you from Adam - but are interested in your business proposition and how you present it on your campaign.
We will work with you to ensure you map out your crowds correctly from the beginning, so you know you’ve contacted the right people, and more importantly, that you start securing investment months ahead of your campaign launching to the public.
4. ‘I can crowdfund to start my company’
There have been many successful start-ups that’ve raised capital through equity-based crowdfunding. However, these days you’re unlikely to be able to simply start with an idea. There’s a lot of competition for investment capital and you need to stand out. You need to have carefully thought-out information materials such as an investor deck, executive summaries, and financial projections/forecasts.
You really need SOME traction, a list of achievements, an impressive previous employment history– you need something under your belt that you can talk to investors about, to show them how you got to where you are today, and why they should invest in you. Why should they get involved? How will it benefit them? Client testimonials and reviews can be an excellent way to validate your proposition if you’re relatively early stage.
If you think you have a brilliant idea for a business, that’s great, but go away and start setting it in stone. It may mean you need to look for other forms of funding first, and come back to crowdfunding when you’ve got more to talk about.
5. ‘Crowdfunding will save my company’
We’ve seen this before, in fact, this year more than ever with the impact of COVID-19, where businesses on the verge of collapse look to equity crowdfunding as a means to bring it back from the ashes. Unfortunately, if a business is failing it’s unlikely to be attractive to investors, at least those who typically support crowdfunding opportunities. If you don’t have a viable business, investors will put their money elsewhere.
The harsh reality is that some businesses who crowdfund are still at risk of failing. Just because you’re passionate about your business, doesn’t mean every investor will be too. A crowdfunding campaign can steer you in the right direction and provide you with capital for growth, but the hard work is up to you and your team to grow and develop your business, incentivising investors to participate in your journey.
That’s why it’s incredibly important to put together a carefully constructed campaign, which promotes your well-thought-out business proposition, makes it attractive to investors and validates the belief that your company has every chance of succeeding in the future. While it doesn’t apply in each and every case, there is the common expression, ‘investors walk into a room backwards, they're always looking at the exit'!