Creating a successful startup is hard; it’s even harder without access to startup funds. However, if you’ve got a great business plan and the ability to create a buzz around your brand, equity crowdfunding could be the perfect option for your business.
New legislation is opening up this crowdfunding option and making it a more viable method of raising capital for thousands of businesses.
An Overview of Equity Crowdfunding
Equity crowdfunding enables members of the public to invest in a privately-owned company. An entrepreneur or a business, generally a startup, will use an equity crowdfunding platform to offer securities in return for an investment from members of the public.
Most commonly, that security will be in the form of shares, and as the company grows and prospers, the value of those shares increases, offering the investor a return on their investment.
Why is this important for businesses?
If you’ve ever started a business, then you know it’s not straightforward, and one of the biggest challenges is raising funds to get your company off the ground. In the past, if you wanted to raise funds through members of the public, then you would need to find a venture capitalist or angel investor (people with a net worth of at least $1 million, or with an annual income of at least $200k).
However, the introduction of the JOBS Act in 2012 opened the door for privately-owned companies to raise capital through regular members of the public.
On the other side of the equation, equity crowdfunding allows regular investors to get in on the ground floor of a business opportunity. Even the biggest companies in the world like Google and Amazon started off life as startups, and with equity crowdfunding, regular people have the opportunity to invest right at the beginning of a future Google’s journey.
For every Google or Amazon though, there are endless examples of startups that fail. In fact, the 2019 failure rate for startups was 90 percent, so investing through equity crowdfunding is a risk.
Trends in Equity Crowdfunding
Many of the trends in equity crowdfunding stem from a need for consumer protection. When you invest in publicly-traded companies, you’re investing in an established, highly-regulated business, but it’s not necessarily the same story with equity crowdfunding.
It takes vast resources to become a publicly-traded company though, so it’s out of reach for startups and small businesses. Instead, they turn to alternative means of raising capital, such as equity crowdfunding, and while this offers regular investors great opportunities, it can also open them up to great risk.
This is why investing in startups was previously reserved for venture capitalists and angel investors because they were seen as having the means and experience to manage that risk. However, cutting the regular investor out of these options also created a two-tier system, where savvy investors couldn’t get in on enterprising startups.
JOBS Act 2012
While protecting investors is important, it meant that regular investors were missing out on promising opportunities, and startups were finding it hard to raise the capital needed to get their businesses off the ground.
This changed with the Jumpstart Our Business Startups (JOBS) Act, which set out legislation to open up the equity crowdfunding market.
Regulation remained strict, particularly compared with some other countries, but crucially, businesses could now reach out to “the crowd” for funding. With Regulation crowdfunding allowing companies to raise up to $1.07 million annually, and Regulation A permitting up to $50 million of funding each year, this offered businesses a viable option to raise capital.
JOBS Act Update 2020
In 2020, the Securities and Exchange Commission made some adjustments to the JOBS Act, raising the amount of capital businesses could crowdfund each year. Under the new regulations, businesses could raise up to $5 million annually through Regulation Crowdfunding and up to $75 million annually through Regulation A.
Since the average seed round in 2020 was $2.2 million, this made equity crowdfunding a much more feasible option for startups, allowing them to secure the funds they need to succeed in their business.
A Growing Market
Equity crowdfunding is a relatively new market, and although it’s valued at over $10 billion, that’s a tiny drop in the ocean compared with the $282 billion raised through venture capital in just a year.
However, equity crowdfunding is growing quickly, and when you look to the markets in other countries, there are signs that this fundraising option could grow exponentially in the coming years.
Over in the U.K., equity crowdfunding is much more established. This is largely due to more favorable legislation that has allowed equity crowdfunding companies to grow much more quickly. However, with the update to the JOBS Act, it’s likely we might see a similar uptick in the U.S. startup market.
How to Get Equity Crowdfunding for Your Startup
As you might expect with a growing market like equity crowdfunding, there are plenty of platforms to choose from. Each has its unique selling points, so it’s important to do your research and find the platform that’s going to represent the best deal for your business.
Once you’ve decided on a platform, you’ve got to apply, and this is a very important step. These platforms are extremely invested in protecting their investors, so they’re going to vet your application exhaustively. You’ll have to portray your business in a strong light, and offer up a business plan that represents value to the platform’s many investors.
If you’re accepted onto a platform, you can then decide on your terms (what type of security you want to sell, how much you want to raise, etc.). This is one of the big bonuses about equity crowdfunding because you’re in control of your terms.
You’re not negotiating with one single angel investor who might be able to negotiate you down. Instead, you’re putting your offer out to the crowd, and it’s up to each individual as to whether or not they take it up.
The last step is taking care of compliance by ensuring you have all the legal documents and pass the financial tests. For Regulation Crowdfunding (up to $5 million), you will need an independent financial review, but for Regulation A+ Crowdfunding (up to $75 million), you will need a full financial audit, which will take a bit longer.
If your business is found to be in good shape, then according to StartEngine you can be ready to raise funds through Regulation Crowdfunding in four to six weeks with very few costs, or through Regulation A Crowdfunding in about six months for a cost of roughly $50,000-$75,000.
Successful Equity Crowdfunding Case Studies
Equity crowdfunding might be relatively new in the financial world, but plenty of companies have had huge success with it.
When we think of startups, our minds are generally drawn toward tech, but one of the greatest examples of equity crowdfunding comes from the world of beer.
Starting life in 2007 as two guys with a love of beer, BrewDog has developed into a $2-billion company, and equity crowdfunding has a lot to do with it. The privately-owned company is 22 percent owned by a collection of 120,000 investors who have put in around $95 million as of 2020.
In a world dominated by a handful of major brewers, this has allowed BrewDog to expand well beyond the reach of your average craft brewery, and they continue to use equity crowdfunding to invest in their green credentials.
Gaming company Paradox Interactive was able to raise $3 million in the first 8 minutes of its offer going live. This goes to show the power of crowdfunding and the ability it offers businesses to raise capital quickly.
Later that year, Paradox Interactive went public, listing on NASDAQ at a value of $420 million. This demonstrates that equity crowdfunding is more than just a tool for raising money, it’s also an opportunity to create a huge buzz around your business.
When someone invests in you, they’re going to become a brand advocate, and when you’ve got thousands of these people around the world, it can catapult your brand into the public consciousness.
Security technology company, Knightscope is a perfect example of the flexibility equity crowdfunding offers. Initially raising $150k in just 7 days, Knightscope used this to scale, and then came back to the table 6 months later to raise $1.1 million.
This was nothing compared to the $20 million they would raise just two years later.
CEO, William Santana Li specifically noted the effect equity crowdfunding had on amplifying the Knightscope brand. This, combined with the capital raised has allowed the company to grow, reaching an estimated value of over $320 million, and leading to speculation that the business might go public.
This is another example of how good equity crowdfunding can give a start-up an excellent platform to go on to much bigger things.
Equity Crowdfunding Companies
The U.S. equity crowdfunding market is largely dominated by three companies: WeFunder, StartEngine, and Republic.
The top 10 platforms raised $209 million in 2020 and over $177 million of that was raised by these three companies.
WeFunder played a big part in lobbying the government over the JOBS Act and has been at the forefront of equity crowdfunding since its beginning. It has the biggest market share in terms of capital raised and can give your business excellent exposure.
One of the most appealing aspects of WeFunder’s offerings is the ability to sign up with no fees until you’ve successfully raised money.
This means you can dip your toe into the world of crowdfunding and focus on marketing your business as an investment opportunity before you have to worry about paying out.
StartEngine boasts a community of over 300,000 investors, which means it’s a great platform to get your startup noticed.
With over 375 successful raises, totaling over $250 million for its clients, StartEngine is one of the first places to look when it comes to equity crowdfunding.
StartEngine prides itself on helping you every step of the way, with a full-service plan that gives you complete control over your offer. It’s focused on keeping the power in the hands of the entrepreneur and allowing them to tailor their offer to suit their business needs.
Republic focuses on the ability of its platform to do more than just raise capital for your business. With over 350,000 investors, it touts its ability to create “true fans and engage supporters” all around the world.
This is certainly an underestimated part of equity crowdfunding, and it’s important to remember that it’s about more than just money. The exposure a successful crowdfunding campaign can bring you is a great source of marketing in its own right, and Republic is quick to highlight this.
Crowdfunding, VC Capital, or Angel Investments: Which is Right for Your Business?
On the face of it, crowdfunding sounds great, but as with anything, it has its drawbacks. When you’re weighing up how to get investment in your startup, you’ve got to look at the positives and negatives, and focus on how they fit in with your business plan.
Benefits of Equity Crowdfunding
- Create thousands of brand advocates around the world.
- Gain public validation from a successful crowdfund.
- Boost brand awareness.
- Maintain control over your business (you’re not offering investors a say in how the business is run).
Drawbacks of Equity Crowdfunding
- You have to be in the right stage of your business development.
- You’ve got to create a buzz around your brand.
- It often takes prealigned investment to get people interested in your offer.
- It can be a time-consuming process.
When you compare crowdfunding with venture capital or angel investments, it’s clear where crowdfunding triumphs, though: control.
When you have thousands of small investors rather than a handful of large investors, the external pressures and potential influence of your investors are much smaller.
Thousands of small investors aren’t there telling you how to run your business, but they are going out into their communities and spreading the word about your business, which can have a huge impact.
Building a thriving startup isn’t easy, but when you don’t have access to capital, it’s a lot harder. In the past, private companies had limited options for raising funds, but with changes to legislation, equity crowdfunding gives startups access to thousands of investors who are looking for the next big thing.
Not only is this an opportunity to raise a large amount of capital, but it can also supercharge your marketing by creating a huge buzz around your brand.
When you raise millions of dollars from investors worldwide, people will start talking about your business and become brand advocates, which is almost as valuable as the money you raise.
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