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Is Equity Crowdfunding Right for Your Startup?

Is Equity Crowdfunding Right for Your Startup?

For many startups, the long-established method of raising the necessary funds to get their business to the next level can be a long and winding path. From conducting research, to pitching to investors, to negotiating equity valuation and potentially adjusting your business plan, a significant amount of work is involved, and it even still, there’s no guarantee that angel investors will ultimately bite.

The pursuit of traditional venture capital routes is important, but we believe that – for the right startups – a Reg CF crowdfunding campaign can be a useful addition to an overall fundraising strategy.

Benefits of Equity Crowdfunding

Of course, the most apparent benefit of equity crowdfunding is that money raised can help push your business to the next level, but there are many ancillary benefits as well.

  • Market validation: A successful past equity crowdfunding raise can show market demand for institutional investors down the line.
  • Community building: Investors want you to succeed, making them more likely to spread the word about your product or service.
  • Efficiency: An equity crowdfunding campaign can give your business heightened exposure to more potential investors and customers, making it an efficient use of business resources.

How Can You Tell if Your Business is Ready?

Equity crowdfunding can work for both early- and late-stage startups. But before you dive into planning a raise, you should take inventory of where your business currently stands.

  1. Do you have proof of concept? Having a product or service that’s already gaining some traction on the market is easier to sell than a product that’s just an idea. Raising funds via equity crowdfunding is generally more challenging – but not necessarily impossible – for companies in the pre-revenue stage.
  2. Have you successfully raised money before? Typically, platforms like MicroVentures look for companies that have raised money in some aspect before launching an equity crowdfunding campaign, whether that be a friends & family round or seed money from an angel investor.
  3. Are you able to recruit a lead investor? While not necessarily required, being able to attract a lead investor indicates belief in your idea from a third party.
  4. Does your team have strong credentials? This isn’t a hard requirement but having team members that have either held key positions at large companies or have helped take other startups to successful exits show investors that your idea has the potential to attract top talent.
  5. Are you able to live without the funds for a while? From signing the deal to closing, you’re looking at anywhere between 3-4 months for a raise. The last thing you want is to be perceived as desperate for cash by investors.
  6. Do you have an exit strategy mapped out? It’s never too early to begin planning your exit, as it will influence your business’s direction long-term. You can be sure that potential investors will want to know what your plan is.

How to Plan an Exit Strategy that Aims for Profitability

Campaign Timing

As mentioned earlier, solid proof of concept can give you an edge and make your offering more appealing to potential investors. If you launch a crowdfunding campaign before you have much in the way of demonstrated success, your campaign may not perform as well as it would have if you had waited until you have more accomplishments to show. The more wins you can present to potential investors, the better.

Determining Raise Goals & Use of Funds

In order to determine how much you need to raise, it’s useful to work backward. Begin by laying out the primary goals of your business. From there, map out the milestones you need to hit in order to reach those larger goals.

Undoubtedly, investors will want to see how you plan to use their money. And if you’ve raised in the past, they will likely want to know how you used those funds to grow your business.

Choosing Your Instrument

The term “equity crowdfunding” is often used to distinguish the sale of securities issued by a private company via Regulation Crowdfunding from other forms of crowdfunding, such as rewards-based and donation-based, which do not involve the sale of securities. Equity crowdfunding, however, encompasses offerings in several different types of securities. When it comes to fundraising, the three most commonly used instruments are equity, crowd notes, and revenue shares. Most often, companies opt for either equity or crowd notes.

  1. Equity – Investors receive a part of the company’s equity, generally as common or preferred stock, in exchange for funds. For investors, the main goal is to make back what they invested upon an exit event.
  2. Crowd Note – Similar to a convertible note, but without a maturity date; a crowd note is a short-term debt instrument that converts to future equity upon a qualified equity financing event.
  3. Revenue Share – A percentage of the revenue goes back to investors until they are repaid, plus a set percentage.

If you need to raise capital for your business, and it sounds like equity crowdfunding could be the right fit, you can get started with MicroVentures by applying for an offering here.