How does a company get funding on an equity crowdfunding site?
Simple – start with some investors already in the bag and on your side and ready to invest from day 1.
Yes, that’s right. Instead of letting the crowdfunding platform bring all the angel investors to you, your job is, ironically, to go out and find investors that will commit to your project – before – it goes live on an equity crowdfunding website.
If you do, then you’ll gain a momentum which will carry you over the funding line.
Here are our tips for building and maintaining the momentum whilst your investment window is open.
1. Don’t start until you have momentum
Investors want to herd together. If they see lots of money going into a project quickly, they are far more likely to follow suit. Equally, if no one is investing, then the deal will look dead in the water.
Effectively, if smart investors are seen to put their money on an crowdfunding bet, then many investors will follow them. If the pace of investment is fast enough to persuade the less experienced or more nervous investors to invest, then the offering will gain momentum which will make it unstoppable and will achieve its funding goals.
However, like pushing the blades of an old windmill, at the beginning it is really slow and hard work, but as the sails begin to move and catch a little wind, so they can move faster by themselves with less effort from you.
Raising equity funding is the same. For instance, the examples from the donation crowdfunding world – such as the pebble watch – demonstrate that when an idea takes hold, it really takes hold.
Equally, e-car – successful raised £100k and managed to achieve 60% of its funding target within the first week.
You need to create momentum.
In fact, many deals start off by the existing shareholders opting to buy small additional stakes. This is great as it demonstrates both a quantity of investors and also a rate of investment. It also gets you off ‘zero’ which is important, as no one wants to be the first to jump in.
However, whilst this is enough to start, the current shareholders can not fund the entire business. Therefore, new business angels must be found.
The best way to do this is via a pre-commitment from known business angels. This is simply that they give you a non-binding commitment to invest when live on the crowdfunding site.
Why wouldn’t the investor want to invest right away? Well, he may prefer to see if other investors are also willing to come alongside the business. This is, in effect, saying ‘I will invest, if others will’. And yes, it gives investors a degree of comfort for which they are willing to pay a small fee in costs to the crowdfunding platform.
There are two ways to do this. Firstly, get to know investors and send them your plans and ask if they will invest. Secondly, start talking to your subscribers and customers to let them know that they will be able to buy shares in your company. You may also offer them subscription or service incentives – such as 12 months free for investors of £1,000.
Telling your subscribers – or your beta users – that you intend to raise money via crowdfunding and asking them for a show of interest – is a great way to assess your likely success rate.
3. Don’t be greedy
The next step is to ensure that you are not too greedy. If you are running a pre-revenue company then the amount that you can equity crowdfund is probably less than £100k. Your business should, until it has revenues, be run on a freelance / contract basis without offices or fixed costs. Therefore, it should be possible to test your idea for a small amount of money.
It seems that an optimum amount to ask for in pre-revenue businesses is about £20k to £60k in return for 10% to 20% of equity.
If you price your business too high – or ask for too much – then you will put off potential investors and end up with nothing.
4. Post launch on the crowdfunding platform
What happens after you have launched your business on the crowdfunding platform? Sit back and wait for the pounds or dollars to roll in?
This is where you begin your three pronged attack
1. Focus on the investors asking questions via the crowdfunding platform. Quick and open answers will generate a sense of trust from which you are more likely to gain financial supporters.
2. Use any opportunity offered by the platform to run online seminars and conference calls to speak directly to investors and ask their questions or concerns.
3. Run your own investment evenings or connect with other equity fund raising activities and run your pitch as part of an evening.
5. Be prepared to reduce your costs
If your funding project is moving ahead, but too slowly, then consider reducing your costs and your investment target. If you can take £40,000 of costs out of a £100,000 project, perhaps by persuading a supplier to become an equity holder for their work instead (ie. sweat equity), then you can raise £60,000 more quickly and re-gain the momentum.
Most investors will stay with a deal that does this, so long as their stake is not watered down. This can be a smart way of moving the goal posts to ensure that the ball ends up in the back of the net!