25 يوليو 2018

What is Crowdfunding?

CHAPTER 2: How to raise funds via equity-based crowdfunding

By Marion Sangouard

The second chapter of this crowdfunding series will be about how to raise funds via an equity-based crowdfunding campaign.

Check out our first chapter on crowdfunding, an explanation on crowdfunding, and specifically reward-based crowdfunding here.

As described in the introduction of this series, equity-based crowdfunding, also referred to as the profit-sharing model or investment crowdfunding, allows funders to become shareholders of a company in a few clicks. This tool makes it possible to increase the amount of the funded company’s capital by urging people to invest money in order to receive a share of the venture’s future earnings. This model is great for start-ups or SMEs in the growth phase seeking to raise sums of several hundred thousand euros or even a few million euros.

The Basics of Equity-Based Crowdfunding or Investment Crowdfunding

Equity-based crowdfunding is a model where funders expect a financial return for their investment. The equity-based model appears to raise greater capital than the reward-based model, even though the most well-known platforms (Kickstarter, Indiegogo) are reward-based ones. Think of equity-based crowdfunding as a hybrid between angel/venture capital funding and the reward-based crowdfunding people tend to be more familiar with. The World Bank deems investment crowdfunding as filling the funding gap for companies that have outgrown the capital that friends and family can provide, yet are too small for venture capital or private equity.

Who can raise funds?

Many companies are not suited to raise equity capital. Equity-based crowdfunding works best for raising growth capital for early-stage startups or startups wanting to scale up. It typically provides over $200,000 and involves giving up roughly 10-40% equity. Pre-revenue businesses could benefit from equity-based crowdfunding.  However, businesses that are already profitable or generating revenue are better suited, as they already have an existing product/service and a committed group (big or small) of customers. Essential for attracting investors is proof of an existing market.  Having traction on the market will also demonstrate to them the startup’s viability. Due to its growth potential, a company in this phase will be more credible and intriguing for investors. The existing user base can also be leveraged for communication about the crowdfunding round.

Why use equity-based crowdfunding?

Overall, running an equity-based crowdfunding campaign gives you the opportunity to validate product/service and market fit, as well as to build an audience and secure funding. Below we analyze the differences and distinct benefits of using equity-based or investment crowdfunding.

Investment crowdfunding over reward-based crowdfunding

Entrepreneurs would, all-things-being-equal, prefer to raise funds without giving up equity. However, the following reasons can push you towards investment crowdfunding over reward-based crowdfunding:

  • 1. Suitable for more kinds of businesses. Equity crowdfunding is not only suitable for customer-focused businesses or product development. It is also quite suitable for B2B companies and more established businesses, and to raise funds for purposes other than product development.
  • 2. Raises greater sums of money. The success rate is higher with equity-based crowdfunding than reward-based crowdfunding when it comes to raising a 6-digit amount.
  • 3. Valuation proof. A successful equity crowdfunding campaign will further validate your company’s valuation. This can be a be a valuable anchor point for future fundraising efforts.
  • 4. Expert feedback. The campaign process is more rigorous and attracts more knowledgeable investors who will challenge all aspects of your business.  This in turn will strengthen your company’s strategy.
  • 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 will contribute a large sum, often deemed “smart money,” towards your goal as a way of validating the proposition). Having “smart money” validation behind your campaign can be a valuable source of contacts and advice.

Investment crowdfunding over angel investors 

When comparing angel investors vs. equity-based crowdfunding, realize it’s not an “either-or” decision, as they can work well together considering that some platforms ask for a lead investor. However, equity crowdfunding benefits from:

  • A likely better outcome on valuation;
  • Broad shareholder base, which can provide many passionate advocates;
  • Strong marketing benefits, due to current interest in equity crowdfunding;
  • Equity crowdfunding platforms often have standardized investment terms that companies sign up to, and thus combat unfavorable clauses that may be inserted by financial investors.
  • Attracting investors may be easier: instead of pitching your startup multiple times to bring angel investors on board, crowdfunding platforms streamline the process by allowing you to post your pitch in one location where it can be viewed by a large number of potential investors.

Further considerations

Prior to starting an equity-based crowdfunding campaign, make sure to consider the following:

-Exposing your company to your competitors. When running an equity crowdfunding campaign, you run the risk of losing control over intellectual property assets and market secrets. Make sure to get legal counsel to understand liabilities associated with the dissemination of your company’s information.

-Securities regulators’ rules of the jurisdictions you’re in and where you’ll run your campaign. Rules vary from one jurisdiction to another, so it’s important to get advice from experts.

-Increasing the number of shareholders. You must be sure about your decision to cede a certain amount of control over your business to many people, and potentially people you don’t really know.

Things to Consider When Choosing the Right Platform

The platform you choose for running your equity crowdfunding campaign is of great importance. Different platforms have different specialties, and it is worth considering all the factors that will play a role in your campaign. For example, are you looking for accredited investors only, or are you also interested in non-accredited ones? The kind of investors you’re interested in, will often determine which platform you choose.

You should also consider how you want to negotiate with investors. Some platforms are entrepreneur-led, which means entrepreneurs set the terms, including the price and the amount of equity given away. Other platforms are investor-led, with a lead investor negotiating terms for other investors. The crowd then invests under these terms.

Finally, it is also important to research your ideal audience’s demographics and target people within your core customer-base. Consider whether the platform appeals to a certain niche or market relevant for your startup. For instance, in Europe, the platform Lita.co is dedicated to equity crowdfunding for social impact startups.

Other key items to take into account include: the minimum investment ticket or the minimum amount an investor can invest, the fees taken by the platform itself, the success rate of campaigns on the platform, what sort of companies utilize a specific platform, if it’s an all-or-nothing platform (defined in part 1 of this series), and how the platform helps you interact with potential investors.

Tips for Your Equity-Based Crowdfunding Campaign

Before the campaign…

Before starting your campaign, ask yourself these questions: « How many shares am I willing to offer and how much funding do I want to raise? What do I need the money for? How will I spend it? How long will it take to generate a return on that investment? What’s in it for my investors? »

You also need to plan your campaign carefully. How many investors do you need and how much are you asking them to invest? Is this an attractive offer? How much time and energy are you going to have to devote to selling your offer? 

Once you have the answers to these questions, prepare your company information thoroughly (prepare your company’s information and necessary documents), as it will be accessible to the potential investors.  This includes:  an investor pitch-deck, proper business plan, information memorandum, financial model, subscription agreement, term sheet, shareholder agreements and company constitution, a presentation video. Depending on the platform you have chosen, other documentation may be required. Check out this example to get a better idea of what is expected. Be sure to gather all this information for the platform to conduct due diligence in the most effective manner. Creating the equity offering should take between 45 and 90 days.

While preparing your documentation, work on a social media plan and a public relations strategy to promote your campaign. The key ingredient in crowdfunding is social media. Even if the largest investors are not reached via social media, it remains a key tool for raising awareness about your campaign. Start by building your network months before the launch of your campaign. Prepare an announcement about the launch at least a month before the scheduled date. When it is time to launch, engage your online network by sharing your prepared announcement. Follow up by approaching journalists and bloggers with press releases to have them cover your campaign and bring further exposure.

Check out this equity crowdfunding marketing checklist from the Crowdfunder platform to gain a better idea.

During the campaign…

Equity offerings are usually live from 30 to 90 days, depending on the platform and the duration you choose. Make it easy for investors to find your project. Connect with your audience by pitching your startup frequently during relevant events. Plug the campaign at the end of each pitch or conversation with potential investors and get your stakeholders on board to spread the word. Frequent communication during the campaign is essential. Have a clear communication strategy using social media, emails, meetings, reports, etc. Keep updating your equity offering and your audience throughout your fundraising campaign. Try to create a personal connection with each potential investor to gain their trust and to keep communication lines open, as good investor relations are key to any successful startup. Ensure the role they will play is clear before they invest in your startup.

After the campaign…

If the minimum amount is not reached, all funds in escrow will be returned to investors. If you have raised the amount needed, it is now your responsibility to issue share certificates, keep your new investors updated, arrange shareholders meetings, and generally meet all the obligations required by law. Fulfill your promises and openly communicate any news and changes to your investors. Stay in contact with your new shareholders and report on business developments at least twice a year.

Now that you have new investors on board, leverage their expertise and contacts to grow both sales and your network! They can also help you to test your product/service and give you feedback, as they now have a stake in your company.

Examples of Equity-Based Crowdfunding Platforms

Tools such as AlliedCrowds or Crowdcafe can help you identify the different equity crowdfunding platforms in the world. You can also test your chances of crowdfunding success here. Many websites and crowdfunding associations can provide you with resources on crowdfunding and help you prepare your campaign.

Here are some examples of equity-based crowdfunding platforms around the world:

North America: Fundable, CircleUp, Crowdfunder, WeFunder, EquityNet

Latin America and the Caribbean: Broota, PlayBusiness

Europe: Crowdcube, Lita.co, Seedrs, FundedByMe, Companisto, Invesdor, FunderBeam, Startupxplore

MENA: Eureeca, Shekra, OurCrowd

Africa: Afrikwity, Afineety, Uprise.Africa, Mbadala, LelapaFund

Asia: Dreamaker Equity, LetsVenture, FundedHere, CrowdPlus.asia, Crowdo, FundNel

Oceania: EnableFunding, Equitise, Birchal

Do not hesitate to browse various crowdfunding websites to learn the best practices from successful campaigns!

The next chapter of this series will be about lending-based/debt-based crowdfunding, also known as peer-to-peer lending.  This is a great way for financially viable startups and SMEs to get funds for their projects!

Photo Credit: Kailash Mittal, 2015 CGAP Photo Contest

This article was written by Marion Sangouard. Marion is a guest blogger with an interest in economics, business, crowdfunding, microfinance, and entrepreneurship. She studied at the University of Paris, Dauphine where she holds a Master's Degree in International Affairs, Development and Peace Studies.

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