Rightly or wrongly, when most people think “crowdfunding”, they think Kickstarter.
But “crowdfunding” as offered by Kickstarter and others is just one of many types (rewards crowdfunding). For entrepreneurs, equity crowdfunding offers another option for financing.
Equity crowdfunding is like a hybrid between venture capital and Kickstarter-style rewards crowdfunding. Equity crowdfunding campaigns look and feel like Kickstarter campaigns – they have video, a public Q&A forum, payments done through an online platform, and so on. But instead of the money going towards a pre-ordered product, the contributors get shares in the company on offer.
No doubt, rewards crowdfunding can be fantastic. It is a wonderful way to validate a new product thorough pre-orders and getting feedback from customers in its design. Since the entrepreneur does not give up shares, rewards crowdfunding also means the entrepreneur retains full control of their company.
Why should you consider equity crowdfunding?
Given the choice between raising money without giving up equity, and raising money with giving up equity, entrepreneurs quite rightly question why they should consider equity crowdfunding at all. Here are seven reasons why:
1. Typically raises a lot more money
Yes, rewards crowdfunding campaigns have raised hundreds of thousands of dollars (and euros, pounds and others!). But it needs to be said: this level of uptake is very uncommon. If you back yourself to beat the odds with rewards crowdfunding, go for it! But the success rate with equity crowdfunding is higher – and depending on the country, it’s possible to raise several million.
2. Suitable for more kinds of businesses
Rewards crowdfunding can work great for product development, but what if you are in the business of something that can’t be touched and bought? Pretty difficult to shoehorn a software business into a Kickstarter reward. I haven’t seen many businesses except consumer products selling to early adopters have significant success on rewards crowdfunding, whereas equity crowdfunding enables B2B businesses, more-established businesses, and businesses needing the money for something other than new product development to raise funds.
3. Expert feedback
Running an equity crowdfunding campaign will expose you to a much more rigorous process than rewards crowdfunding. You’ll have outsiders from the platforms critically looking at your business as an investment proposition before you can even launch. You’ll need to get your company strategy nailed down. You’ll need to have your shareholder agreement, company constitution and share structure cleaned up. These processes are, in themselves, highly valuable exercises – especially if you are planning to sell in the future.
4. Valuation proof
One thing that owners really struggle with when selling their business is valuation, and justifying it to the buyers. An equity crowdfunding offer is great validation to kick off negotiations – if your campaign is successful, the public has validated an equity value for your company. A rewards crowdfunding campaign shows something different – mostly your ability to execute on marketing and that demand for your product exists. Some companies have used equity crowdfunding even when they don’t actually need the money, just to prove up their valuation, prior to an IPO.
5. Smart money
Some platforms will ask you to anchor your equity crowdfunding offer with a “lead investor” (someone from an angel or VC background, who contributes a large sum towards your goal as a way of validating the proposition). Rewards crowdfunding money tends to get people who are highly engaged in providing feedback on your product design, but will be silent on other areas of your business development. Having that “smart money” person in there can be a valuable source of contacts and advice, incentivized to see your company succeed.
6. Makes you run faster
Some entrepreneurs would rather not be beholden to outside shareholders. If you’re more into using your business as a vehicle for “lifestyle design” and aren’t interested in an eventual exit, it’s true that outside shareholders are not going to be for you. But if you’re going for big growth, having financial backers to satisfy will impose a whole lot of commercial disciplines to push you along faster.
7. More marketing benefits
Running a rewards campaign has lost a lot of its novelty – journalists I talk to say they are approached daily with requests to feature the latest rewards campaign of the day. By contrast, equity crowdfunding platforms tend to have just a handful of offers “live” at a time – two or three, rather than hundreds or thousands, making it easier to stand out from the clutter.
So as you can see, there are quite a lot of really good reasons to bite the bullet and offer up equity in your precious company. Whether equity crowdfunding, rewards crowdfunding, or neither, or both are right for you is something you should think carefully about, and get advice if you think you need it.
Nathan Rose is the Director of Assemble Advisory, a consultancy for companies wishing to pursue investment crowdfunding campaigns. Assemble Advisory assists with picking the right platform, putting together offer content and financial models, allowing companies to raise money sooner.