“I need capital, Eric.”
Sitting in my archives are hundreds of emails with the same plea.
And although my comeback tells entrepreneurs to bootstrap and run lean for as long as possible, there does come a time to seek the almighty buck.
Startup entrepreneurs can knock on the door of angels, venture capitalists, friends, banks or their Aunt Milly -- but crowdfunding?
Judd Hollas, Founder and CEO of EquityNet, shares helpful details of crowdfunding so you can determine if it’s right for your startup.
To get your arms around this, last year the global online crowdfunding industry raised $5.1 billion for thousands of cash strapped businesses, charities, and startups. In fact, according to Massolution’s 2013 Crowdfunding Industry Report, equity-based crowdfunding raises 40 times more per company than any other type of crowdfunding in the marketplace.
Simply put, equity-based crowdfunding allows entrepreneurs to reach investors interested in purchasing equity in their startup or other privately held small business. In stark contrast to your average fundraising effort as seen on platforms such as Kickstarter and Indiegogo where founders do not give up a percentage of ownership in exchange for the cash.
If you ponder the launch of an equity crowdfunding campaign, here are the 3 types of equity crowdfunding, 4 tips to make the most of your efforts and 10 valuable resources to dig deeper:
Three Types Of Equity Crowdfunding
Equity I: Enacted as a result of the IPOnet, SEC No-Action Letter issued in 1996 -- it allows for accredited investors to view private investment opportunities on a password-protected website. The vast majority of issuers who use Equity I rely on Rule 506 of Regulation D, which allows them to raise an unlimited amount of capital from an unlimited number of accredited investors. According to Hollas, this type of crowdfunding would suit entrepreneurs who want to avoid public exposure of their fundraising campaigns.
Equity II: Relies on Title II of the JOBS Act which went into effect last September and allows entrepreneurs to publicly advertise their need for funding. Founders who engage in Equity II can raise an unlimited amount of capital from an unlimited number of accredited investors -- all done through equity crowdfunding portals which make it simple to advertise their offerings across the web. Becoming the most popular type of equity crowdfunding, it exposes entrepreneurs to a huge audience of potential investors. In fact, go this route and you can potentially share your business with 6-8 million accredited investors in the U.S.
Hollas says “Entrepreneurs willing to publicly advertise their need for funding and who are also willing to take reasonable measures to confirm the accreditation status of potential investors are a good match for Equity II.”
Equity III: Expected to go into effect later this year, this type will allow unaccredited investors to participate -- in other words, the 99% of investors. Allowing equity crowdfunding platforms to offer and sell securities online, entrepreneurs will enjoy the ability to potentially reach out to over 50 million Americans. Of course, exposure to a larger investor audience who might lack sophistication in investments also means entrepreneurs will have more regulatory requirements to manage.
Four Tips To Make The Most Of Your Fundraising Efforts
1. Create A Solid Business Model/Plan
Although I am a huge fan of a working business ‘model’ vs. a business ‘plan’, the basic premise remains the same: you must show investors you have traction, customer validation and possess a solid plan to maximize your market opportunity. Hollas says “The advantages of a well-developed business plan cannot be overstated. Not only does it serve as a powerful fundraising tool -- it provides a solid framework for operations, helps establish your priorities, and helps you determine your company’s valuation and how much equity you need to part with to reach your fundraising goal.”
2. Prepare Yourself Legally
Raising capital in exchange for equity brings tremendous responsibility and regulation. Do your homework. Learn the 3 types because each has varying levels of regulatory compliance and limitations on who can invest in your company and how much you can raise. Plus, grab a good attorney because a private placement memorandum (PPM) is necessary for any offering you make. Hollas says “Doing so helps protect you and your company as it discloses regulations that dictate the offering and indicates to the investor that you uphold a professional attitude towards regulatory compliance with the SEC.”
3. Evaluate Crowdfunding Platforms
Although equity crowdfunding platforms have simplified the fundraising process, there are hundreds to choose from. Hollas says “If you decide you want to start a crowdfunding campaign, keep in mind that not all are created equal. Look for a platform that stands by its policies to prevent fraud, has a large, vetted investor population, and provides you with an array of crowdfunding tools.”
4. Understand Your Audience
According to Hollas; “Most investors typically look for companies in industries they’re familiar with, so you’ll want to focus on those who have experience with your industry first. Most crowdfunding platforms can sort investors by their interests, so take advantage of that feature.”
One more thing: Below are some free online tools and informational sources you may want to consider before launching a campaign.
10 Crowdfunding Tools And Resources
CFIRA – Crowdfund Intermediary Regulatory Advocates
The crowdfunding industry’s leading experts formed this organization after the signing of the JOBS Act to work with the SEC, FINRA, and other governmental entities to help establish industry standards and best practices. It provides resources to learn more about state and federal regulations regarding equity crowdfunding and also provides a wealth of other informational content.
Crowdfund Insider – Current Events, News, and Education
Crowdfund Insider is a site dedicated to providing extensive coverage on the crowdfunding industry to help educate people on current issues, policies, and events that affect the crowdfunding community as a whole. It also offers brief tutorials that explain the different types of crowdfunding, types of investors, and strategies to increase your odds of funding.
A startup risk calculator helps entrepreneurs better understand their business risk and how to improve the odds of success. Results generated from this calculator are based on real-world data gathered from over 500,000 businesses from across North America.
A valuation calculator helps you determine an accurate valuation of your business you can use to establish how much equity you would need to sell to reach your funding goal. The results this calculator generates are based on market data gathered by EquityNet from over 3,000 businesses across North America.
Crowdfund CPA - Crowdfunding Audit/Review Cost Calculator
Current legislation requires an audit for raises over $500,000, and reviews for those over $100,000. This calculator can help you determine how much a review or audit of your company’s financials would cost prior to starting a crowdfunding campaign.
Crowdnetic – Crowdfunding Market Data and News Feed
Crowdnetic offers real-time market data gathered from crowdfunding platforms across the world, as well as news and articles and original content from industry leaders reporting on the current state of the crowdfunding community. The site also provides details on a multitude of current crowdfunding campaigns and tools to screen crowdfinancing data by a variety of criteria.
Powered by Crowdnetic and a good source of news and educational content.
Run by the ‘fathers of crowdfund investing’.
Crowdfund Investing For Dummies
Book on Amazon written by Sherwood Neiss, Jason Best and Zak Cassady-Dorion. Understand the investor’s perspective.
Extensive blog with a vast amount of educational content for entrepreneurs looking to raise funds.
NOTE: I'm Eric. Life-long entrepreneur and Founder of Mighty Wise Academy. If you'd like to learn more of what it takes to become a successful entrepreneur, you can connect with me here.
