When you’re running a business, there may come a point where you are looking for additional investment for further growth. Equity crowdfunding has become an increasingly common method of raising capital for your business.
What is equity crowdfunding?
Equity crowdfunding allows private businesses to raise finance from individuals on a regulated platform. It works in a similar way to other equity financing options, where you exchange shares in your company for cash.
How does equity crowdfunding work?
Your business is listed on an equity crowdfunding platform online, which permits investors to buy shares in your business. What makes crowdfunding different is that it allows businesses to obtain a smaller amount of money from a large number of investors or ‘crowd’ - who in return, own a proportionate slice of equity in the business.
The shares are typically pooled into a nominee structure (that holds all the crowd shares). That way, the nominee structure then owns the total combined number of shares in the company and the company only needs one agreement with the nominee.
What should I do before starting an equity crowdfunding campaign?
Before launching your campaign, it’s crucial that you undertake extensive market research on current trends as well as your target audience. You need to be able to identify what sets you apart from your competitors, and why investors should trust you with their investment.
Crowdfunding tends to attract customers of the companies rather than sophisticated investors - so you need to consider that when sharing your story. You need to be able to identify what sets you apart from your competitors, and why investors should trust you with their investment.
A key part of any business seeking investment is to have a strong business plan in place. This should include information on your business model and its revenue streams. This can demonstrate to investors how their funding can help elevate the business, which can instil investor confidence in you and your business.
Additionally, you need to ensure you have a pitch which communicates your brand story, while engaging your investors with accurate business information and forecasts and your vision to grow the business.
You need to establish your funding goals and ensure you are looking for the right amount to grow your business, as asking for too much or too little can impact the overall success of your plan.
Due diligence is a crucial part of the equity fundraising process. Investors always do their own research before investing any money, so make sure to have all your information available. By having your financials, legal standing, and future plans in place, this will show you are professional and serious about your business, which will develop investor confidence.
What are the benefits of equity crowdfunding?
Easier access to capital
Small businesses can find it difficult to secure funding from high street banks due to strict affordability tests and economic uncertainty. However, crowdfunding platforms allows access to funding from a diverse group of investors who are keen to invest their capital in your business for an equity stake in return.
Greater access to networks
Equity crowdfunding platforms can have an extensive pool of investors, which can provide businesses with exposure to thousands of potential backers across the world. By taking advantage of these platforms, businesses can amplify its reach and increase the chances of fundraising success.
Business owner remains in control
The business owner is able to decide how much equity they are willing to give up in exchange for the investment amount, which allows them to remain in control of their business and its decisions.
Crowdfunding platforms eases administrative stresses
When businesses negotiate with potential investors, there can be many administrative and regulatory requirements, which can delay the investment process. But with equity crowdfunding, the platform itself can care of these time-consuming tasks for business owners (for a fee), which can lead to capital being raised more quickly.
Crowdfunding prevents debt financing and interest rates
When you take out a loan from a bank, you have an obligation to repay the amount in full alongside its interest rates, which can be a recurring drain on your company’s profits. However, this is something you can avoid with equity crowdfunding, allowing you to focus on maximising your business’ growth potential.
What are the risks of equity crowdfunding?
Crowdfunding platforms can be expensive to use
Crowdfunding platforms will often take a certain percentage of any funds raised in your campaign, which will impact the amount of money you have raised. There can also be additional fees for payment processing to be mindful of.
You must share your financial details
On any equity crowdfunding sites, you are required to disclose your business’s financial information to your potential investors. The company are required to provide investors with continuous updates, which can be time consuming.
The risk of reputational damage
As the equity crowdfunding platform is in the public domain, a lack of funding success can be viewed by your customers and your competitors - which can lead to the business’ reputation being negatively affected as a result.
You can end up with no investment if your funding target isn’t met
If you fail to meet your funding goals, you don’t necessarily keep any of the investment pledged from the campaign. Typically, these funds will be returned to the investors, and this will leave you with nothing to show for your campaign.
It can be incredibly time consuming
Running an equity crowdfunding campaign can take months. It involves a lot of marketing effort to reach a target audience, and the marketing material has to be high quality to appeal to investors. There will be questions raised throughout the process from potentially hundreds of investors that will need a response. Managing the campaign is a task on its own, so this can be distracting to business owners.
Where can I go if I am looking for equity crowdfunding investment?
The best place to start is to find an equity crowdfunding platform that is suitable for your business, as this can make or break whether you can have a successful crowdfunding campaign.
You can join the UK Crowdfunding Association (UKCFA), who supports the advancement of crowdfunding and alternative finance, through providing support for its members, while allowing businesses to access alternatives funding opportunities. By adhering to the UKCFA code of conduct and supporting strong regulatory framework, this protects businesses and investors alike.
The Development Bank of Wales has years of experience and a track record of delivery. As an active co-investor, we are able to build flexible financial packages that can work with a range of funding to suit you - whether it’s to support growth, buying a business, or developing a tech ventures.
You can make an initial enquiry through our contact us form and we can start discussing your options.
