Startup fundraising is typically a strenuous process that involves months of preparation, numerous investor pitches, ongoing research, and adjustments to your business plan. Furthermore, this process is very lengthy and very few startups actually wind up earning an investment from VCs or angel investors after putting in all that work.
To put things in perspective, back in 2013, just 0.91% of startups received funding from angel investors and a mere 0.05% received VC funding. Bottom line? Startup fundraising is no walk in the park.
Crowdfunding as a Viable Part of a Startup Fundraising Strategy
Can equity crowdfunding actually become a successful part of your fundraising strategy? We think so.
Just take a look at some of these statistics on equity crowdfunding:
- The number of unique offerings in 2017 was 481, up 267% from 178 in 2016
- Proceeds in 2017 were $49.2 million, a 178% increase over $27.6 million in 2016
- Total investors in Regulation Crowdfunding increased 158% from 28,180 in 2016 to 44,433 in 2017
Note: Some companies conduct Regulation Crowdfunding raises concurrently with other raises, which may influence the final figures. Also, while the percentage increase from 2016 to 2017 is impressive, it’s important to know that Regulation Crowdfunding first became took effect in May 2016 so the number of months in 2016 compared to the number of months in 2017 may not be an exact match.
During its first year of taking effect, Regulation Crowdfunding was used by 335 companies to raise more than $40 million. For an industry that’s still in its infancy, crowdfunding shows great promise as a legitimate startup fundraising method.
Creating a Startup Fundraising Strategy
There is no uniform approach to creating a fundraising strategy because each company has unique requirements that don’t allow “cookie cutter” strategies to succeed. However, there are beneficial elements of crowdfunding that relate to more traditional funding methods which can be incorporated into a larger strategy.
Benefits of an equity crowdfunding raise can include:
- Gaining market validation
- Strategic insights that can indicate a potential growth cap
- Greater exposure to investors
While the benefits of crowdfunding can be great, it’s also important to consider alternative fundraising opportunities. There is no one-right-way approach. In some cases, it can be wise to seek traditional venture capital funding before—or in conjunction with—crowdfunding.
Getting the Timing Right
Startupbootcamp has identified five ways that timing can make or break the success of a startup, all of which relate to fundraising:
- The amount of time that is spent on early development
- The point at which the startup pivots to a new focus
- Failing at the right time in order to capitalize on a breakthrough or opportunity
- When the startup enters the market
- How fast the business scales up
Getting the timing right at each stage of the business is crucial. Sometimes a startup can have a fantastic idea that comes along when it’s too early to address a market need. For example, Idealab Founder, Bill Gross, discussed how perfect the timing of YouTube, Airbnb, and other startups was in entering the market:
Equity Crowdfunding as Part of Your Strategy
There are several kinds of crowdfunding, but for the purpose of startup investing, we’ll focus on equity crowdfunding.
Equity crowdfunding was created when “Title III of the JOBS Act created a federal exemption under the securities laws.” In essence, equity crowdfunding makes it easier for startups and early-stage companies to access capital.
Remember those benefits we discussed earlier? There’s a way to incorporate each of those three benefits into your fundraising strategy that can increase your chances of success.
1. Gain Market Validation
One of the biggest problems entrepreneurs face is proving the efficacy of their business, products, and services. The more unique the business, the harder it is to convince people of its value.
Raising money through equity crowdfunding can serve as a form of market validation, proving that your startup does offer value. Not only that, it also shows that investors had enough faith in your company to fund, further validating the business.
2. Strategic Insights that Can Indicate a Potential Growth Cap
Equity crowdfunding can offer a great way to gauge the market’s response to your startup and its products or services. Often, startups will experience an increase in organic website visits and receive free media exposure as a result of crowdfunding.
In addition, the amount of capital raised through equity crowdfunding can be used to calculate a startups’ potential growth cap and determine when the company could become profitable.
3. Greater Exposure to Investors
Using equity crowdfunding to raise money has the added benefit of providing a bigger platform on which to share your brand with potential investors and customers. This can go a long way towards strengthening the image of your business.
On the investor’s side, funding your startup gives them a reason to care about the brand because they want to see the company succeed. Better yet, they become valuable brand advocates who actively promote your startup.
For potential customers, once they see your crowdfunding campaign they may research your business and ultimately decide to purchase your products or services.
Together these three benefits can help improve your fundraising strategy and contribute to the overall success of your startup.
Choosing an Equity Crowdfunding Platform
Finding the right crowdfunding portal to host your fundraise can be stressful. The key is to identify portals that have a proven track record of success.
Here are a few questions that can help you research regulation crowdfunding portals:
- How long have they been in business?
- Do they emphasize due diligence and curation of investments?
- Are they a registered broker-dealer and Title III Funding Portal?
- Do they allow investors to interact with the startups’ team?
- Has the portal offered any highly successful offerings in the past?
Ideally, you want to be able to find a portal that meets the following qualifications:
- It focuses on due diligence and curation of investments.
- It is a registered broker-dealer or a Title III Funding Portal.
- It enables investors to communicate with team members who work for their offerings.
- It has an established portfolio of startups which it has raised for.
If a funding portal checks all of these boxes, you may want to seriously consider contacting them to learn more once you’re ready to start raising funds.
It can be difficult to know when crowdfunding should become a part of your larger startup fundraising strategy. If you’re trying to raise early seed money or are pursuing a follow-on round, here are some things you need to consider:
- Efficiency: Fundraising plays a key role in the growth and development of a young company. However, the time you spend fundraising is time not spent growing your business. Equity crowdfunding can help make your fundraising approach more efficient by wisely allocating your time and allowing you to virtually pitch to a greater number of potential investors.
There you have it. Deciding whether crowdfunding is a viable—and beneficial—aspect of your startup fundraising strategy should take into consideration all of the previously mentioned variables.
The bottom line is this; always do what’s best for you and your business.