Equity crowdfunding has asserted itself as a popular choice for entrepreneurs looking to raise capital for their startup business.
With equity crowdfunding, individual investors provide funds in the startup stage in return for a percentage of equity as the business grows.
This differs from traditional crowdfunding sites such as Kickstarter or Indiegogo, where backers receive rewards in the form of a product or service rather than equity.
In this article, we’re taking you through some of the key pros and cons of equity crowdfunding, so you can decide if this method is right for you.
Is it time for your startup to get equitable?
Let’s find out.
Pros of Equity Crowdfunding
In the spirit of positivity, let’s start out with some of the high-level benefits that can come through an equity crowdfunding approach.
Access to Capital
Equity crowdfunding allows for a large number of people to invest in your startup, which could lead to big money backing your project.
It’s rare to find a platform that allows for large sums of money to be raised in such a short period of time.
Additionally, many startups that are in the very early stages might utilize equity crowdfunding as a means of securing capital rather than through the bank, which is generally more unwilling to take a chance on a project in its infancy.
Available to Variety of Businesses and Founders
No matter your business idea or history as an entrepreneur, equity crowdfunding is a very inclusive marketplace.
Even if you don’t qualify for a traditional business loan due to poor credit or lack of collateral, you aren’t disqualified from raising money through equity crowdfunding.
Additionally, almost all industry groups have had success with an equitable approach, including:
- Application software
- Entertainment
- Real Estate
- Consumer packaged goods
- Biotech
- Restaurants
Whatever your idea, there is a place for it in the equity crowdfunding market!
Fast Growth Potential
For small businesses looking to scale, it can be difficult to get financing—especially if you don’t have two years of solid revenues.
Equity crowdfunding presents an opportunity to receive an influx of cash fast, which you could reinvest into things like:
- Research and Development
- New employees
- Marketing
- Manufacturing
Keep in mind that if you are starting a restaurant, for example, having a face behind your equity crowdfunding campaign that has had success in the industry previously can go a long way.
While everyone is granted access, backers are more inclined to support projects from teams with a strong track record.
Cons of Equity Crowdfunding
I hate to be the bearer of bad news, but equity crowdfunding is not exclusively beneficial.
There are some drawbacks that you should be aware of so that you can decide if the benefits outweigh the risks.
You Give Up Ownership
Much like an episode of Shark Tank, you will have to give up ownership of your company in exchange for capital.
This stake that your backers get never goes away. You’ll be paying out these part-owners for the entire lifespan of your business.
Your group of investors will be expecting a successful exit so they can cash out. This is a lot of pressure and can raise the stakes from personal responsibility to a larger obligation.
Do you want the extended pressure?
If not, traditional crowdfunding might be a better bet, as most of the liability is exclusively placed upon yourself.
It’s Complicated
When it comes to equity crowdfunding, there are tons of rules and regulations.
You’ll be constantly working to ensure that you are in accordance with regulators which can drain valuable time and money.
You might even have to hire lawyers if things get really sticky.
With a good deal of research upfront, you can work to avoid complications and stay on track. But it takes a lot of understanding and can be frustrating if you are slowed down by fine print.
Upfront Costs
When launching an equity crowdfunding campaign, you’re going to have to lay out some money upfront.
These costs include:
- Creation of a killer campaign video
- Marketing expenses to get the word out
- Legal and accounting fees
On average, these costs account for over 5% of the total amount fundraised on average, which can be a significant chunk.
Should I Use Equity Crowdfunding?
Companies that succeed with an equity crowdfunding approach tend to have the following qualities:
- Ability to attract crowdfunding investment from both private and accredited investors
- Businesses with a great pitch and scalable product
- Businesses with a vast network of potential investors
- Businesses that can produce 5 times or more return for investors
Sound like your startup might fit the bill?
Then equity crowdfunding could be for you.
Keep in mind that much of the initial funding dump comes from the personal and professional network of the entrepreneur.
If you don’t have a dedicated circle willing to help you get started, it might be difficult for your campaign to attain and maintain the necessary momentum to reach your fundraising goal.
What Platforms Are Best?
If you’re looking for a comprehensive list of platforms for your equity crowdfunding campaign, check them out here.
Some of the major players include:
All four of these platforms have raised millions of dollars from thousands of investors on their platforms.
If you’re thinking about going outside the ‘Big 4,’ make sure you take on the following considerations:
- The platform is reputable and well-established with strong internal marketing to attract potential investors to its site.
- The platform has strong customer support services to provide you with the training you need to be successful.
- Safe, secure, and competitive in terms of processing payments and transaction fees.
What You Should Know About Equity Crowdfunding
Equity crowdfunding is a relatively new method of raising capital for startups, becoming legal with the 2016 Jumpstart Our Businesses (JOBS) Act.
The JOBS act aimed to make investment funding more widely available to small businesses while protecting individual investors.
Anyone can invest in a Regulation Crowdfunding campaign, whether they are accredited or not. While some platforms will limit investors, others are open to a broader group of investors.
Learn more about the JOBS Act and all that it means for equity crowdfunding here.
It’s important to do this research—you don’t want to be blindsided with regulations after your campaign launches!
Conclusions
There are pros and cons to any method of raising capital, and equity crowdfunding is no exception.
Some of the major pros include:
- Access to capital from a wide range of investors
- Available to all types of businesses and founders
- Fast growth potential for scaling your business
However, you should be aware of some of the major cons, as well:
- You give ownership of your company, which can also add pressure
- High upfront costs to get your campaign off the ground
- Complicated rules and regulations
Your decision to use equity crowdfunding for your startup business depends on your long-term business goals and willingness to share the profits going forward.
Looking for a more in-depth understanding of the equity crowdfunding process?
I’ve got you covered with my awesome book, Equity Crowdfunding Explained.
You should also check out my Youtube Channel and Podcast, where I’m always giving out the best tips and talking with the most successful entrepreneurs from all sectors of the crowdfunding industry.
Think you’re ready to launch a campaign, whether it be through equity crowdfunding or through a more traditional platform like Kickstarter or Indiegogo?
It’s time to book a coaching call with me. I’ve helped tons of campaigns reach their funding goals in the past, and I’d love to go to work for you as well!
