The pros & cons of equity crowdfunding for start-ups

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If you’ve read any other article on Runway, you may very well have come to realise that there is no ‘easy option’ when it comes to raising investment. There are, however, ways to maximise success and ensure you don’t fall into any traps. And, the golden rule is – education!

To start, let’s look at what ‘Equity Crowdfunding’ is. Equity crowdfunding is where members of the public (i.e. the ‘crowd’) invest in an early-stage company in exchange for shares (i.e. equity) in that company. Depending on the set-up of your shares, those new shareholders will have partial ownership of your company and stand to profit if/when the company does well. Of course, should the company not do so well, those shareholders risk losing some, or all, of their investment.

To help you decide whether or not crowdfunding is the right route for you, we’ve put together the top pros and cons you should weigh up before committing to any equity crowdfunding campaign as a start-up founder.


Pros

Marketing Opportunity

Running a crowdfund can be a fantastic opportunity to market your business to audiences that are new to your brand.

It is critical to showcase your company in the best possible light from day one. Ensure that you have a high-quality video and strong marketing assets to compliment your campaign. This includes promoting your raise on social media and emailing your existing community to get them involved. A well-executed marketing strategy can make all the difference. Some good examples of this are Monzo, Penfold, and InvestEngine – all of whom reached overfunding in record time!

Crowdfunding is a really ‘hot topic’ at the moment, with brands using the narrative of an upcoming crowdfund to secure front-page PR opportunities and unlock audiences that they previously wouldn’t have been able to at this scale. Aligning a crowdfunding campaign with your core marketing strategy can increase ROI and boost sales at the same time as filling up the investment pot on the crowdfunding platform.

Building a Loyal Community

Arguably the best thing to get out of a crowdfund is building a strong community. The investors you onboard through the crowd will become not only your customers but your biggest fans and advocates. Regardless of the amount they invest, crowd investors have been known to be very loyal and will want to see the company succeed and grow.

Looking after your crowd investors beyond the crowdfund is imperative, you need to make sure you keep to the promises you made, for example; execute on the rewards you offered and keep in touch with them on a regular basis. Make them feel special, after all without them you may not be able to reach those desired business goals and propel growth.

Lastly, if you decide to raise from the crowd again, then this community will serve a large part of future crowdfunds. Some real life examples of this are Penfold who raised over £3m from 760 investors in less than 24 hours and Monzo who raised £20m in an impressive 2 hours 45 minutes from 36,000+ investors!

 

 

Business Validation

Crowdfunding is a very public way to fundraise and there aren’t many places to hide. You need to be prepared to share a considerable amount of detail regarding your business including information about your financials as well as your product or service.

For a successful campaign, this can be a great way to validate your business and test out the market with a wide pool of people. Crowd investors’ feedback can be extremely insightful and this will be most evident in the “Forum” section of whichever platform you decide to use. The Forum allows potential investors to ask questions, leave comments and give founders (that’s you!) the opportunity to interact directly with your crowd.

The number of investors and how much they invest gives a strong indicator of the potential of the business and how much people believe in the product or service. Additionally, the most successful campaigns use these public metrics to spur on other potential investors to not ‘miss out on the next big thing’.

Leveraging the Legal Structure

Offering financial promotions to investors i.e. raising investment, is a regulated activity by the FCA here in the UK, which means a big part of the value of crowdfunding platforms is in their underlying regulation and legal structure. Unless someone self-certifies as a Sophisticated Investor or High Net Worth individual, you cannot simply offer someone the opportunity to invest in your business. Business Angel Investors and VC funds get around this by either being regulated themselves, operating under an appointed representative umbrella or self-certifying, but if you want to raise money from your personal or professional network or your customers and community, then you need to use a dedicated platform like Crowdcube or Seedrs to provide you with a regulatory stamp of approval and make investing in your business actually legal.

Both platforms also operate a nominee structure, which means that you can raise from as little as £10 per person and only manage one single legal entity (the nominee in which all of your new investors hold their underlying shares). This is a huge advantage if you would like to accept smaller cheque sizes from lots of people who you may not wish to hold directly on your CAP table otherwise.


Cons

Cornerstone Investment (a.k.a Lead Investment)

The crowd will not fill your entire investment round and you will still need to do some form of raise offline before a platform (like Seedrs or Crowdcube) will allow you to launch your campaign. This is often referred to as cornerstone investment or lead investment.

This element is often overlooked by early-stage founders who may get drawn in by the stories of success in the press. We know from experience that before any successful crowdfund has gone ‘public’, a great deal of work will have been happening behind the scenes to secure a sizable amount of lead investment (find out more about the phases of a crowdfunding campaign here).

Depending on the size of your raise this is usually between 70% and 80% of your minimum target, so you still need to spend time on outreach ahead of any crowdfunding campaign. This is manual and time-consuming, and you may hear a lot of ‘no’s’. Persistence, consistency, and research are key at this stage. For tips on how to find investors that are right for you and your business, watch this free recording with investor Helena Murphy on “What investors are really looking for.”

Public Failure

Whilst the publicity of a successful campaign can catapult your business to a new height, it can be risky undertaking a crowdfund, and not every campaign is successful. Unfortunate as it sounds, you must consider the possibility that it could fail and what that would mean for the reputation of your business.

One of the common reasons a campaign can fail is by setting an unrealistic target – should you not reach your minimum target, you will not receive any funds from the crowd. To reduce this risk, we advise that you think about setting a realistic minimum target because you want to reach overfunding as quickly as possible, which will actually attract more investors!

Time Consuming

It might seem like crowdfunding is an ‘overnight’ solution to raising investment, however, executing a crowdfunding campaign is hard work.

Preparation is key and it takes time – coming up with the right pitch, filming the video, writing and designing a deck suitable for the crowd, marketing your campaign, finding lead investment, not to mention the legal side of any fundraise – there’s a lot to think about!

When the campaign is live you will need to continually promote it across the platform, write engaging updates, and post across your social channels. It is a full-time job when you’re in the thick of it for a good few months so you may wish to engage a professional firm to help you throughout the process.

Overall, a successful equity crowdfunding campaign can be hugely rewarding for both your business, team and investors. Ultimately, only you can make the decision as to what is the right strategy for your business at any given time. If you’re still on the fence, you can apply to the Raising Partners Office Hours for some completely free advice on what might be best for you.

Once you’re ready to crowdfund we’ve also created a completely free tried-and-tested crowdfunding project plan template to give you the best possible chance of maximising your success.

This is the exact project plan we use at Raising Partners which has helped us raise over £40m to date in equity crowdfunding for our clients!