Today, entrepreneurs have a wealth of options when funding their business or projects. Traditionally, a loan from a bank or close friends and relatives were the only two viable options. However, with the proliferation of technology, new models of funding are now available. One such method is equity crowdfunding.
Equity crowdfunding differs from rewards-based crowdfunding found on platforms such as Kickstarter or Indiegogo. Whereas the aforementioned websites allow entrepreneurs to keep full control over the company, equity crowdfunding may not, depending on whether it is debt lending (which gets paid off with interest) or strictly equity. However, that’s not to say there aren’t significant advantages to equity crowdfunding. It can offer entrepreneurs a number of benefits beyond access to capital and the potential for quick growth. To decide if equity crowdfunding is right for you, consider the following questions.
Do You Value Ownership or Capital?
If your company produces a product or offers a service and you only require enough capital to secure your first round of manufacturing, you likely have a customer-funded business. The revenue earned from each round of sales could be enough to keep your startup afloat. In this case, equity crowdfunding may not be an ideal strategy.
However, if you can’t achieve your revenue goals until you have more capital and are able to hit a larger scale of production, it’s likely that equity crowdfunding is an appropriate strategy to attain your goals. By bringing in experienced investors, you will have enough financial support to fund your startup through the roller coaster of rising and falling revenue, and you’ll have access to valuable tools and resources.
How Much Value Will a Mentor Bring to Your Startup?
If this is your first startup, having an experienced mentor could be the missing piece that can mean the difference between success and failure. By helping you plan and market your business, an effective investor could serve as a mentor and financial supporter. If, however, you are an experienced entrepreneur, you may not need a mentor who has equity in the company. In this case, you may want to refrain from conceding equity in your startup.
Have You Planned an Exit Strategy?
The potential to buy low and sell high is greater when investors participate in earlier rounds. If you have projected revenue and a specific exit figure for your business, giving equity via crowdfunding could help you reach your goal. On the other hand, if you’re looking to establish a business that brings you steady income over a longer term, inviting outside parties to own a chunk of your income stream may not be the best strategy.
Have You Considered Cost?
If the cost of raising capital is a concern for you, equity crowdfunding isn’t necessarily a more affordable option; the cost of both equity crowdfunding campaigns and more traditional methods of raising funding varies greatly. As you’re looking into how much it costs to run an equity crowdfunding campaign, be sure to consider legal fees including SEC compliance and attorneys fees, marketing costs including hiring a marketing agency, platform costs and more. As you’re looking for an attorney, a marketing agency or anyone else to help with your crowdfunding campaign, compare costs, but also make sure that anyone you hire is very familiar with the JOBS Act and with the equity crowdfunding process.
It’s an exciting time for entrepreneurs. The availability of equity crowdfunding presents an opportunity for entrepreneurs to succeed in business that wasn’t available 10 or 15 years ago. Be smart and use the questions above to help you decide if equity crowdfunding is the right approach for your startup.
More questions about equity crowdfunding? Get in touch today to discuss running an equity crowdfunding campaign.