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A Guide to Equity Crowdfunding for Startup and Small Businesses Entrepreneurs

Posted on June 29, 2021June 30, 2021 by Clive Reffell

This is an article first published by Enterprise Nation in their ‘Learn Something’ series: https://www.enterprisenation.com/learn-something/guide-to-equity-crowdfunding/. There is an earlier article on rewards-based crowdfunding.

Enterprise Nation members – or any startup or small business owner – hardly need to be reminded that starting a business is risky. One of the benefits of equity crowdfunding is it’s a risk that many small investors are prepared to share and contribute towards, and sometimes for other reasons than seeking a financial return on their investment. I have experience of hundreds of pitches from startup founders who wanted backers to either order their new product or buy a stake in their business. It gives me valuable insight to share with anyone who wants to explore using crowdfunding, and this guide to equity crowdfunding for startup entrepreneurs answers several common questions.

Benefits of equity crowdfunding for entrepreneurs

Startup businesses are turning more and more to a range of alternative finance options for early stage investment. Equity crowdfunding platforms are website marketplaces that bring together businesses that want investors, and people looking to invest modest amounts in ways that provide better returns than the negligible high street interest rates. As well as raising money there are several other benefits for entrepreneurs.

It can be good marketing, it gets a business noticed.
Successful backing provides “proof of concept,” helping a business to then get further investment from other sources.
Feedback from “going public” with ideas and aims helps to refine plans and targets.
It’s a virtuous circle in which customers can become investors and investors can become customers – sometimes very valuable ones.
It encourages investors to become brand advocates, climbing “the loyalty ladder” to give the businesses positive word-of-mouth support
It is a public event, establishing a confirmed value that early stage investors clearly agree with.
Investors may choose to back a business where they identify more with its social, ecological or environmental aims than its financial prospects: for many such people the prime reward is the buzz of helping an enterprise they admire to get off the ground.
One of the benefits of equity crowdfunding equity is that it is not a loan, the money is not repayable. Though there is a degree of responsibility to shareholders, and legal obligations.

Why don’t more new businesses use equity crowdfunding?

Crowdfunding isn’t easy. When you look at crowdfunding projects hosted on the various platforms they are like icebergs, which show 10% above the waterline. Below the water is a massive amount of unseen work. I have identified seven key elements of crowdfunding projects, and they all have to be executed well to have a real chance of success. Here are three fundamental ones:

Build a crowd of potential backers, which may have to start months before a crowdfunding project actually goes live on a crowdfunding platform. This requires marketing that includes any amount of activities, techniques, social media and other communication channels.
At least 30% of the financial target should appear in a project within the very first few days of going public, and it requires personal pre-selling by the project leader. It could be an angel investor or a VC. Money arriving quickly creates momentum, and gives confidence to potential backers who may otherwise sit on the fence. Platforms are unlikely to let a crowdfunding project go to a public phase if it has not achieved this level of pre-backing at a private pre-selling stage.
It vital to communicate a clear vision of what the money will be used for, how it will advance the company’s development, how that progress will be measured, and any intentions to run subsequent rounds of fundraising.

There is also a quality bar set by crowdfunding platforms. They only earn from successful projects, so they don’t want to waste time on weak ones. A business owner might get knocked back several times to improve any part of their project.

The time these matters can take means that turning to crowdfunding only as a last resort, perhaps after exhausting every other option, can make it impossible. Think months ahead so you do not have to rush and take shortcuts, because a business that fails to reach its financial target will receive nothing.

How long does equity crowdfunding take?

After preparation to complete the seven key elements to a good standard, the equity crowdfunding platforms generally agree on around allowing three months, starting with a “Hidden phase” as shown in this chart created by the Nordic platform Invesdor. The “Public phase” usually runs for four to six weeks. It’s hard for fundraisers to maintain the required intensity level for longer.

What do investors look for?

Think of crowds of investors as hunting in packs to uncover signs of weakness that will cause them to make their investments elsewhere. Any number of potential backers can ask detailed questions through the crowdfunding platform. One of their benefits of equity crowdfunding is that the answers will be made visible for all potential backers to see and maybe comment on further. Questions will include items such as these:

what the money raised is going to be spent on and how far it will advance the business’s development
evidence of a true market opportunity
financial statements and projections
timetabled KPIs to monitor progress
intellectual property, or some other hard-to-copy factor of exclusivity
existing or potential competitors
the management team’s abilities and experience
strengths and weaknesses of supply and distribution chains
the impact of any known forthcoming legislation
current and future customer interest/sales prospects
eventual exit strategy

All the information – not just most of it – has to be prepared in advance and made ready for swift replies. Larger investors may request personal calls or meetings – project leaders have to make sure their schedule allows time for this. Questions can come in at any time of any day. It’s full-on 24/7, don’t go on holiday!

Potential investors also look for very advantageous tax benefits offered by HMRC. UK income tax payers who invest in businesses registered under EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Schemes) are able to claim a refund of up to 50% of their initial investment through tax relief. If a business later fails, investors can claim a further refund. When a business succeeds, investors can shelter returns from Capital Gains Tax. There are also very early stage SEIS benefits for company directors. They really are worth checking out. Further information is readily available from a number of equity crowdfunding platforms including Seedrs, Crowdcube and Crowd For Angels.

How much does equity crowdfunding cost?

In the Preparation and Hidden phases of equity crowdfunding (see earlier image), there are costs for preparing documents, maybe intellectual property fees, a video and image library, and a budget needed for crowd-building and marketing activity in the build up to and then during the public crowdfunding.

If a startup business considers offering its suppliers payment with equity, they need to keep in mind that shares acquired this way are void of EIS and SEIS tax benefits, so will be of less value.

On completion, crowdfunding platforms all charge commission on successful projects, plus sometimes a completion fee, and there will be transaction fees for handling the investors’ payments. Build these costs in to the fundraising target. Allow for 10% of the total raised to begin with, and check with each platform how much you can bring this down by, and what else they can provide.

How much to ask investors for

Do not expect or attempt to raise all the money you need to fully grow the business in one round of funding. Plan it in stages. As a business grows it commands a higher company valuation, meaning startups are able to raise money in subsequent rounds based on higher share prices.

Road builder MacRebur recently ran its third round of equity crowdfunding. In Round 1 its share price was £7. In Round 2 it was £17 and this time each share was valued at £21, marking the company’s growth.

The Cheeky Panda, a brand of bamboo-based tissues I talked about in the reward-based crowdfunding article, valued shares in its first round of equity crowdfunding at £4.26. It offered 10% of the business for £50,000 in 2017, and when they hit target it represented a public statement that “the market” believed the business was worth £500,000. Then they raised further investments from an angel investor, and institutional backers came in later on. In their second round of equity crowdfunding each share was £18.25, and it was £36 in round three in 2020. Their fourth round in June 2021 saw its shares priced at £50. This is likely to be the final round of equity crowdfunding before an IPO when they have grown revenue to over £50m a year, which could be in 2022 or ’23.

What support does a crowdfunding advisor provide?

An experienced crowdfunding advisor knows the standards required by the crowdfunding platforms, and can save a business owner time and money by avoiding a series of knockbacks to improve a project. They can also negotiate with the platforms to gain added marketing support and other “extras.”

When a crowdfunding project team looks for professional support, there are many marketing, PR and video production companies that have added ‘’crowdfunding’ to their list of capabilities and services. My own experience of some of them has shown patchy competence, with little unerstanding of how to unlocjk the benefits of equity crowdfunding. Do the ones you might choose really understand the dynamics and nuances of crowdfunding projects? A specialist crowdfunding advisor will be able to tell, and can also fulfil a Campaign Coordinator role to steer the entire process.

A crowdfunding project has a start date, an end date, and takes a lot of work. If the financial target is not achieved it’s all for nothing. Though success can make dreams come true and transform lives forever. Follow me on Twitter for frequent examples of crowdfunding projects, and please get in touch when you want to discuss your own crowdfunding project.

How to Run Successful Equity Crowdfunding

Posted on February 27, 2021June 30, 2021 by Clive Reffell

Expert Insights to Successful Equity Crowdfunding

I had the privilege of putting questions to a number of international experts in an event organised by Crowdsourcing Week about what goes in to a successful equity crowdfounding round. This article sums up their key insights. If you want to discuss any plans of your own, I’m an independent crowdfunding advisor, which means I have no ties to any particular crowdfunding platform beyond my own personal investments. Send an email to [email protected].

Raising capital through equity crowdfunding

Andrew Zhang of Republic, a U.S. equity crowdfunding platform, ran through the essential structure of a money-for-equity campaign.

They have certainly hosted enough projects to have built up a wealth of insight and experience. Republic has enabled over 150 companies to raise a total of $45 million. Last year the average raise was $500,000. Most of the investors were non-accredited, and the raises were capped at a top limit of $1,070,000 by SEC regulations. Top Insights to Successful Equity Crowdfunding

Successful equity crowdfunding can run alongside other funding mechanisms that between them can bring in a maximum of $5m.

There is a strict vetting process to ensure that only the best opportunities are put to Republic’s database of investors: under 1% of all applicants end up launching a campaign.

However, keeping to the theme that equity crowdfunding has democratized the process of funding a startup business, 40% of project leaders have been women, and 20% have been Black or Latinx.

Funding generally comes from four sources: friends and family; people who know the business – customers, suppliers, other stakeholders; Republic’s network of investors; new supporters brought in by marketing activities.

The usual timeline is for a three to four month campaign from going live online to issuing shares to new shareholders. Though prior to this there are issues including arriving at a company valuation, preparing marketing materials, and pre-selling to reach c. 30% of the financial target. Pre-selling ensures the public stage of a successful equity crowdfunding campaign starts with a bang and not a whimper, and gives it dynamic momentum that attracts investors looking for a home for their money.

Lessons from 10 years of crowdfunding in Europe

Christin Friedrich, CEO of the Innovestment platform in Berlin, is also Chair of the European Crowdfunding Network.

Key lessons include the realization that at whatever stage of a company’s growth, in addition to raising money, successful crowdfunding involves, builds and strengthens communities. In an increasingly competitive environment this requires expert communication skills.

To be a successful equity crowdfunding project it should be clear what it is asking for; what the organisation raising the money hopes to achieve; and who will benefit. Any funder can go on to become a customer, an advocate, or a supplier. So keep communicating after the crowdfunding closes, share news about your progress through achieving milestones or report on KPIs.

As well as improved professionalisation of all aspects of the process, regulations are adapting to crowdfunding being a global practice. Funds need to flow freely to encourage cross-border financing, though authorities have to be aware of laundering. European harmonisation through the ECN will ease cross-border payments from outside the EU – which of course from 1 January 2021 includes the UK.

Retail investor access to VC deals

Equity crowdfunding is often described as having democratised access to investment funds for startup owners who do not mix in the same circles as high net worth individuals and VC managers. In the same way, equity crowdfunding has opened up opportunities for retail investors to invest in private companies, sometimes alongside institutional backers.

Jonathan Medved is CEO of Israel-based OurCrowd. As the country’s biggest VC investor, he said their links with crowdfunding are becoming more stretched and tenuous than before, though they still allow individuals to piggy-back on their VC investments. For a management fee and a 20% carry-over on profits, retail investors can enjoy the same pre-IPO terms as a VC. Half of OurCrowd’s investment deals are in Israeli businesses.

OurCrowd’s prospects are looking good. Their investor network includes 50,000 U.S. accredited investors. Jonathan is delighted the U.S. SEC (Securities Exchange Commission) is relaxing its stringent rules on who is allowed to invest, and how much they can invest, through crowdfunding projects. Professional qualifications can now replace former demarcations based on income or savings definitions. And smaller businesses will be able to raise more than the previous cap of $1,070,000.

Also, a recent normalisation of political and trade relationships between Israel and the United Arab Emirates has the potential to unleash a torrent of investment capital, perhaps as much as half a billion USD in the first 12 months.

Crowdfunding for Policy Makers

Author and management consultant Tim Wright, of TwinTangibles, closed the event with a session based on insights gained from co-authoring a recently published book “CROWDASSET, Crowdfunding for Policy Makers.” The book looked at crowdfunding from a variety of perspectives, given that policy makers can represent the interests of diverse stakeholders.

His visual device representing the core benefits of a crowdfunding campaign relates to core policy maker interests. In gaining a better understanding of what is of key concern to policy makers, crowdfunding project leaders can better ensure their campaign is fit to succeed.

Naturally, the key element of the whole exercise is that businesses want to grow. For that they need Finance, which in equity crowdfunding is achieved by selling part-ownership of the company. This aspect is overseen by financial regulators and authorities that ensure compliance with financial regulations. National tax regimes differ on how they treat the funding received, cross-border investing is scrutinised for possible money laundering, and the U.S. has an added complication of different rules that apply to accredited and non-accredited investors.

Some countries still bar equity crowdfunding in the interests of protecting unsophisticated investors from possible financial harm, including India.

Crowdfunding also provides Insight to company founders through receiving feedback from people on the nature and structure of the business, validation of the value put on the business, and feedback on the proposed products or services to be delivered. Business trading standards authorities, as an example, would be keen to know that any products offered by firms using crowdfunding meet statutory minimum requirements.

Good Communication is vital for successful equity crowdfunding. This covers the marketing activities, raising awareness and stimulating sales. Most countries have extensive regulations on what can and can’t be said about crowdfunding opportunities, which can differ from one to another. So a crowdfunding campaign can’t always be picked up from one country and then run again in another.

Networks relates to a business’s customers, suppliers, supporters (who may not always be customers), and social media followers. Trading and Advertising authorities would once again be involved here.

And finally, there are also the vested interests of the crowdfunding platforms themselves, who are often members of their own professional trade representation and lobbying group. Such groups include the UK Crowdfunding Association, European Crowdfunding Network, National Crowdfunding & Fintech Association (NCFA) in Canada, and Bundesverband Crowdfunding eV in Germany.

The breadth of interests and responsibilities of related policy makers is thus extremely wide.

Don’t forget, if you want to disucss your own thoughts or plans for an equity crowdfunding project feel free to email me in confidence, I’m an independent crowdfunding advisor: [email protected].

International Lessons on Achieving Crowdfunding Success

Posted on November 29, 2020November 29, 2020 by Clive Reffell

**A typical timing plan for an equity crowdfunding project**

My work with Crowdsourcing Week as a content marketing creator and as an independent crowdfunding advisor has brought me in to contact with crowdfunding experts and thought leaders from around the world. We have talked about reward crowdfunding, equity crowdfunding, and crowdfunding being used by major corporates. I’d like to share some recent insights.

Lessons from 10 years of Crowdfunding in Europe

Christin Friedrich, CEO of the Innovestment platform in Berlin, is also Chair of the European Crowdfunding Network.

Top Insights to Successful Equity Crowdfunding

Key lessons learned at the ECN include the realisation that at whatever stage of a company’s growth, in addition to raising money, successful crowdfunding involves, builds and strengthens communities. Though in an increasingly competitive environment this requires expert communication skills.

An equity crowdfunding project should make it clear what it is asking for; what the organisation raising the money hopes to achieve; and who will benefit. Any funder can go on to become a customer, an advocate, or a supplier. So keep communicating after the crowdfunding closes, share news about your progress through achieving milestones or report on KPIs.

Evolving best practices in Reward Crowdfunding

New Zealander Nathan Rose is a crowdfunding strategist and author, his latest book is about reward crowdfunding. Across several years he has been able to track changes to what used to be, and what are now, the key factors for rewards crowdfunding success.

Crowd-building and effective communication strategies have definitely changed over the years. For example, these days, many more successful projects have used paid-for social media advertising.

Though project owners should not rely on purely virtual contact – he recommends getting out to events and meet influential people in person. Though beware of trade shows where more people are likely to be like yourself, looking for investment, rather than be potential backers.

PR efforts to crowdsource media coverage remain a valid activity, though not for the reasons you might expect. A published article is unlikely to generate much traffic to a crowdfunding project, though a collection of media logos is a strong endorsement of the viability of a project once site visitors see them.

Nathan also warned of a classic error. He still comes across project owners who calculate the production cost of the rewards they will supply, and set a donation value without checking the fulfilment costs to deliver the items. Seemingly successful projects can then sometimes incur a loss for the project owner, or are simply abandoned leaving many disappointed backers.

Nathan Rose’s latest book on crowdfunding

Tips for startup founders on running Equity Crowdfunding

Cheryl Campos, Director of Growth and Partnerships at the US equity crowdfunding platform Republic. Cheryl provided the article’s main image on a general timing plan for an equity crowdfunding project.

Before accepting an investment opportunity to put to its network of half a million investors, Republic uses four important criteria to evaluate startups: “The 4 Ts.”

Team
A startup funder has to have prior career and industry experience that adds up to a set of skills and expertise that can give investors confidence. But few investors will back a one-man (or woman)-band, and want to see a credible management team already in place, a team that has bought in to the founder’s vision of the startup business and have the ability to make a solid contribution.

Traction
Evidence of traction includes a passionate and engaged user base. Perhaps this has been achieved by an earlier round of rewards crowdfunding?

Technology
Is the startup’s product range superior to competitors? Or maybe their technology to make their products is superior, delivering a cost advantage. Are they following the sector’s traditional business model, or have they developed breakthrough innovations to shake up the established incumbents?

Terms
The terms a startup offers investors can vary, based on different methods of estimating a company valuation and with different classes of preference or voting shares, for example. It could make it harder to reach a financial target if crowdfunding backers receive poorer terms than other investors.

Corporate use of Crowdfunding

Esben Bistrup Halvorsen, Co-founder and CEO of Danish platform Lendino, gave a Crowdsourcing Week webinar some examples of major corporations using reward crowdfunding.

Sony has a co-creation and crowdfunding platform called First Flight, which operates within Japan only. It encourages entrepreneurial “Challengers” to propose ideas and suggestions for new products and services and allows them to canvass for input and support among a community of Sony fans and early adopters.

Fleshed-out ideas that have withstood this crowd’s scrutiny can then go on to a reward crowdfunding stage to check for demand to actually acquire the product or use the service. Where response from Sony’s First Flight crowd is strong enough to warrant investment, Sony makes the products and services available. Who knows, someone may come up with the best idea since the Sony Walkman!

Thinking about your own Crowdfunding?

In this most recent stage of my marketing career I’ve immersed myself in crowdfunding for the past six years. The crowdfunding projects you see hosted on any of the crowdfunding platforms are like looking at the 10% of an iceberg that’s visible above the water level. If you want to know the full extent of what has to be prepared to achieve success, let’s have a call. In the first instance please send an email to [email protected].