Equity crowdfunding has become entrenched as as a serious way to fund small and medium-sized UK businesses.
Rather than go to friends and family, asking for a bank loan, or pitching to angels or VC, business owners can instead access finance directly from members of their “crowd”.
The uninitiated may be wondering what is equity crowdfunding. In brief, equity crowdfunding has some things in common with the “rewards” crowdfunding on offer via sites like Kickstarter and Indiegogo – both rewards crowdfunding and equity crowdfunding set a funding goal, and both use online platforms to solicit contributions from the public.
The main difference is, rewards crowdfunding sees people putting the cash towards pre-ordered products, while in equity crowdfunding the crowd are buying into an ownership stake.
The crowd in equity crowdfunding becomes small shareholders in the venture, rather than customers.
Equity Crowdfunding Sweet Spots
Equity crowdfunding tends to be for small-medium businesses raising funds for expansion, giving up a minority stake of ownership, typically in exchange for at least £50,000.
While it is legally possible to raise less money than this, the equity crowdfunding platforms will tend to favour companies raising greater amounts because their fee is a percentage of total capital raised.
By offering shares instead of a product, equity crowdfunding becomes possible for a much greater variety of business models than rewards crowdfunding.
Rewards crowdfunding only really works for physical products which can be shipped, but equity crowdfunding can additionally work for B2B businesses, service businesses, and businesses selling very-low-priced and very-high-priced products.
None of those businesses would find it easy to create a Kickstarter / Indiegogo reward, but all of them can be (and have been) funded through equity crowdfunding.
Equity Crowdfunding Limitations
While the industry sector of the business does not matter so much, equity crowdfunding does have some limitations:
- The company needs to have some existing traction (it cannot just be an idea)
- The company cannot be too reliant on the founders (this rules out arts & craft businesses, for example)
- It is problematic if the founders are overly concerned about privacy, since equity crowdfunding exposes the company strategy and financial information to the public
- It is not for selling shares or facilitating business sales
Pros & Cons of Equity Crowdfunding
At its heart, equity crowdfunding is a marketing exercise. It can be used to raise capital and promote a company at the same time.
It can be a game-changer for the exposure it can bring. This is an advantage over angel / VC money, where fundraising is done behind closed doors, and marketing is treated as an entirely separate activity.
On the other hand, the heavy promotional effort that goes into an equity crowdfunding offer is an enormous amount of work. There is media to line up, there are pitch documents to prepare, and then there are all the necessary legal disclosures.
All of that is time-consuming, and company founders who have been through it emphasise the amount of work involved.
If a business can instead get funded quickly by a financial investor, the time saved can be put towards actually growing the business instead.
Small and medium sized businesses are always stretched for time, so if you don’t have the capacity to add another “full-time job” to your schedule, then equity crowdfunding probably isn’t for you.
Equity v Rewards Crowdfunding
It’s worth comparing equity crowdfunding to rewards crowdfunding too.
The best part about rewards crowdfunding is it doesn’t dilute business owners stake in the company – the founders get to keep full ownership rights, unlike equity crowdfunding. However, equity crowdfunding can secure a deeper sense of customer loyalty for the long term.
The difference between being a customer and being a shareholder is a bit like the difference between dating and marriage – if you would rather have your crowd engaged for years to come, equity crowdfunding can be a better way to bring that about.
How to Build a Crowd Ahead of Crowdfunding
Raising money through the crowd is not just about getting the word out there to as many people as possible – it’s about deepening connections, and ideally doing that well in advance of asking people for money.
The main thing to realise about crowd-building is that it’s all about targeting an investor avatar.
Many small-medium businesses already know a lot about their “customer avatar”, but investors may not be a perfect overlap with your customers. The marketing messaging to investors needs to hone in on the business model, which is a bit of a difference from selling the product or service. Make sure to tweak your copywriting accordingly.
The best success rate for equity crowdfunding promotion comes through a company’s own, existing crowd. It is a mistake to rely too much on efforts during the campaign. There are many ways to build a crowd, but try to think where your investor avatar is, and go there.
Appearing on your crowd’s radar allows your crowd to build their familiarity with your company gradually. People invest in companies that they know, like and trust. Email is a good way to do this, at scale.
If your messages are a welcome presence in their day, then your crowd will get to know you well enough so that the “big ask” (to invest in your company) feels like a very natural next step.
Finally, campaign co-creation can be a great way to give your crowd a sense of ownership, before asking them to contribute money for real ownership.
Bring them along for the ride as you build your campaign. Ask them to vote on which video to use, or request they share your updates on social media – perhaps with a prize on offer to encourage uptake. This Roadmap to Equity Crowdfunding Success has some useful pointers that will help too.
Raising six figures or even seven figures of growth capital through equity crowdfunding is eminently possible for small-medium UK businesses. It will work best of all for companies which have a clear need for both the money, and the publicity that an equity crowdfunding offer can bring to the table.
Before approaching an equity crowdfunding platform, get clear on your business objectives, and give careful thought to why equity crowdfunding makes the most sense to achieve them.
About the author
This guide has been written exclusively for ByteStart by Nathan Rose, the bestselling author of Equity Crowdfunding: The Complete Guide For Startups & Growing Companies. Today, he runs the website www.startupfundingsecrets.io, to help entrepreneurs from all over the world use equity crowdfunding to gain marketing exposure and raise money at the same time.
More from ByteStart
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- 4 Ways to Make Your Crowdfunding Campaign Stand Above the Rest
- How to Prepare Your Business for Crowdfunding
- Equity v Rewards Crowdfunding: Which is Best for Me?
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- How the Enterprise Investment Scheme (EIS) can help you raise funding to grow your business
- What to do when the bank says “NO”
- A Guide to Merchant Cash Advances
- Revolving Credit Facility – The short term funding solution every small business owner should know about
- Invoice Finance – What is it and how can it help my business?