A practical guide to equity crowdfunding
Traditional venture capital fundraising can do wonders for a business, but it doesn’t work for everyone; equity crowdfunding can offer a viable alternative
Crowdfunding platforms, such as Indiegogo and Kickstarter, have been providing alternative finance options since the mid-2000s. These rewards-based programmes paved the way for increasingly popular equity crowdfunders such as Crowdcube, SyndicateRoom and Seedrs, companies that aim to help entrepreneurs bypass the barriers of traditional funding.
Crowdcube co-founder Luke Lang says their initial goal was essentially to “democratise investment”, adding that “before Crowdcube, if you wanted to invest in a startup or early-stage business, you basically had to be a wealthy, white, middle-aged man”.
There are many limitations to debt financing and venture capitalist fundraising, including the risks of over-leveraging and diminished control over business decisions. Perhaps the most alarming red flag is the widespread discrimination would-be entrepreneurs of certain demographics encounter going down these routes.
According to RateMyInvestor’s 2017 Diversity in Venture Capital report, in the United States only 9.2 per cent of startup founders were female and 75 per cent of venture-backed founders were white. Similarly, a 2019 report by Extend Ventures found just 0.24 per cent of UK venture capitalist investment went to Black-founded businesses which, as Lang says, is representative of the biases held by the people calling the shots at most investment brokerage firms.
Serial entrepreneur and co-founder of SoHo Token Labs Elissa Shevinsky says the issue is compounded. “Many investors make decisions based on pattern recognition, when nowadays there are more and more examples suggesting successful startups are led by founders who don’t fit the traditional mould,” she points out.
Equity crowdfunding platforms allow for anyone, regardless of their wealth or existing portfolio, to invest in businesses, opening doors to investors who have more fluid ideas of what constitutes a dependable founder.
Initially, coronavirus dealt a blow to investment activity, but Lang claims four out of five of Crowdcube’s largest campaigns have occurred since the pandemic. Seedrs chief investment officer Kirsty Grant says they’ve had “a very busy year, despite the disruption” and SyndicateRoom co-founder Tom Britton has noticed that while valuation growth for earlier-stage companies has experienced a “cooling-off” period, businesses in later-stage rounds of fundraising “seemed to soar even higher”.
That being said, there are still factors putting entrepreneurs off this style of investment. Aditya Banerjee, global managing director at emerging ecommerce company ClusterHall, says he might be discouraged from equity crowdfunding. “There are many stakeholders; it can be chaotic and might disrupt progress,” he says. If that isn’t a concern for your business and you’re inspired by the success stories of Monzo, Revolut, What3words and the hundreds of other enterprises that used this method to their advantage, here’s how to make it work for you.
Choose the right platform
The first thing to do once you’ve decided to raise capital this way is to choose the facilitator that’s best suited to your product and business plan. They may appear to be similar, but each platform has unique features that could elevate or hinder your campaign. For example, as the first platform of its kind, Crowdcube has a larger pre-existing investor base than somewhere like SyndicateRoom, which is younger but offers a hybrid service of angel investment and equity crowdfunding more attractive to certain entrepreneurs. Seedrs, on the other hand, pride themselves on the support they provide to portfolio businesses through their easy-to-use marketing and public relations toolkits.
Be prepared and manage your expectations
“Raising capital is competitive and those who have spent more time researching the market, iterating their business plan and really figuring out why their business deserves to get capital will get capital” says Britton. A University of Bath study into successful crowdfunding concluded the best way to optimise this kind of fundraising is to keep funding goals as low as possible. Campaigns that hadn’t raised a sizeable percentage of their goal after ten days of being live were deemed as unattractive to potential investors, according to the study. Percentage of funds raised is more important than the actual amount because most platforms present this data graphically.
Stay transparent and responsive
For Britton, the best online campaigns are run by founders who are polite, honest and quick to respond to questions posed by potential investors. “If I’m going to invest in someone, I want to know how they respond to both challenges that are fair and challenges that may not be relevant. You’ll get customers in both veins; how you treat them will determine how successful you are,” he says. Britton also doesn’t recommend bluffing or cocky campaigning, claiming one of his biggest red flags is hearing a founder say they are the only ones who do “xyz”. “It shows a naivety of the market. In the off chance you were, in fact, the only company to do ‘xyz’ exactly as you do, there are many, many, that do it similarly or who offer a substitute good. This, along with a comparison table that shows your product as having ‘everything’ and your competitors as only having some, just sends signals you are not aware of the whole market,” he says.
Network and promote smart
The University of Bath study also found campaigns performed best when presentation videos were of quality production, short and focused on the fundamentals, such as product description, development timelines and fund allocation. The overall purpose of these videos is to grab attention, convey credibility and create product demand. Grant believes founders who do well are dynamic storytellers and expert networkers. “The ability to communicate your business and the problem your business is solving is a fundamental of any funding source, alongside community-building. Platforms like Seedrs bring a large network of investors, but the first investors in most campaigns will come from the business’s own audience, whether that be customers, users, followers or personal networks. They provide the initial validation for a funding round, which will then make it attractive to new investors,” she says, surmising that “crowdfunding is not for everyone, particularly those who are too scared to tell the world about their business and shout about their fundraiser”.