Early-stage businesses have a great opportunity to use equity crowdfunding to raise funds, grow brand awareness, and build a loyal crowd of supporters, even before the product launch.
However, while it may look simple to set up and run an equity crowdfunding campaign on a platform like Crowdcube or Seedrs, it actually takes a lot of preparation behind the scenes.
These platforms have a reputation to uphold. They want investors browsing their site to feel assured that campaigns have a good chance of success.
Obviously, any investment comes with a certain amount of risk, and early-stage companies can be particularly prone to fail, but there needs to be a level of security and confidence to make equity crowdfunding work.
That’s why every reputable equity crowdfunding platform applies their own rigorous due diligence process to prospective campaigns.
Evidence supporting your claims
Crowdfunding platforms will examine every single claim a company makes – from market size to team bios – looking for evidence to verify its accuracy. If anything from your video or pitch page can’t be evidenced, it needs to be cut or rephrased.
A lack of evidence can trip up even the most prepared of businesses, causing significant delays to their campaign launch. Don’t have 20 years’ of payslips proving you worked in a particular field? Then it will need to be rewritten. Can’t evidence that your software will improve efficiency? Then you can’t say so.
Having worked with clients on dozens of campaigns across all of the major equity crowdfunding platforms, I see the same issues time and again. Here are my top tips to help your campaign sail through due diligence with ease…
1. Vet your video
The first thing investors usually view is your pitch video. It’s where you quickly explain your business, capture the personality of your brand, and pitch the investment opportunity. However, while the information contained in the video may not be readable, it will still be thoroughly checked by the platform and require evidencing.
One of the big issues arises when companies create their video before initiating the due diligence process as claims made without sufficient evidence will need to be edited out.
If you have a number of claims that can’t be evidenced, you may have to go back and reshoot the whole thing, wasting time and money.
To help avoid this issue, I recommend submitting the video script to the platform to review before you start shooting. Then go through the script line by line to highlight the claims and find appropriate evidence for them, adding references as notes or comments as you go. That way, your platform manager will be able to quickly and easily tick off each claim.
If there are any claims they challenge and you can’t evidence, you can always tweak the script or cut it completely, helping to maintain a good flow to the final video.
2. Firm up your figures
Investors love seeing figures to back up your business idea. They want to know the size of the market, it’s growth potential, and how the business has performed so far.
Founders often like to quote great sales figures or growth rates, selecting the best possible figure from those available. But if you can’t practically evidence your figures then they won’t be accepted. That means showing your books and maths to the platform for verification.
This can, however, be difficult for a small business. You may not have had a full financial year yet or you may still be finding your feet in the market. While you want to give a good impression, your figures may not back you up yet.
Rather than massage the figures or extrapolate wildly – both of which will get caught in due diligence – it’s much better to find a reputable source highlighting the scale of the problem you intend to solve.
If you can show that X amount of your market has a particular issue, this can serve as a good indicator of your potential market size and is much better than a dubious figure you estimated yourself.
When it comes to your financials, some estimation is to be expected. Don’t be too bullish though, as this will get picked up immediately. Instead, you could offer a range of forecasts based on various factors, such as investment raised. This will allow you to keep your bullish forecasts while offering something slightly more realistic as well.
As with all financial figures, however, you will need to be clear with your working. Explain how you came to the various figures, highlight the models used, and be sure to specify which are the actual, estimated, and forecast figures.
3. Take stock of your team
Aside from your figures, investors will be keenly interested in the team behind the business. It’s them who will ultimately make the business successful or not. Team credentials are, therefore, essentials.
Team bios can, however, be one of the most difficult parts to get through due diligence. Again, you’ll need to provide evidence for each and every claim. That may be easy enough to do for claims like “worked for XYZ company”, as you can simply provide a payslip or P45.
However, claims such as “worked in the industry for 30 years” are much harder to evidence as you’ll need 30 years’ of uninterrupted payslips as evidence – a feat ranging from extremely difficult to totally impossible, depending on the quality of your record keeping.
If your record-keeping is less than perfect, I would advise sticking to the more easily-proven claims such as qualifications gained, companies worked for, businesses started, etc. However, it’s important to note that a CV or LinkedIn profile does not qualify as evidence and won’t be accepted by crowdfunding platforms.
Getting your campaign through due diligence can be difficult and incredibly frustrating. However, the process will embed the information deep in your own mind, making it easier to discuss without referring to your notes. It’s like training yourself on how to talk about your business to potential investors!
To avoid frustration and delays to your campaign, my advice is to start as early as possible. If you are honest and clear with your claims, can back them up with evidence, and tag each claim with said evidence, you’ll sail swiftly and smoothly through due diligence. Not to mention, your platform manager will love you for it!
About the author
This guide has been written exclusively for ByteStart by John Auckland, a crowdfunding specialist and founder of TribeFirst. Tribefirst is the world’s first dedicated marketing communications agency to support equity crowdfunding campaigns, and has helped raise in excess of £25m for over 60 companies. John is also Virgin StartUp’s crowdfunding trainer and a regular contributor to ByteStart. You can benefit from more of his crowdfunding expertise in;
- How to Get Investors to Back Your Crowdfunding Campaign
- How to Prepare Your Business for Crowdfunding
- Equity v Rewards Crowdfunding: Which is Best for Me?
- 5 Reasons Why You Should Crowdfund in 2019 (and How to Get Started)
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