Crowdfunding is not a new concept for those looking to raise capital for a business or invention. Numerous platforms exist on the internet with the primary objective of connecting capital seekers with those looking to invest. For the entrepreneur, this is a great opportunity to raise funds without having to attempt the Sand Hill Road dance. However, certain pitfalls do exist that you should be aware of before signing up with the first platform that you find.
This leads nicely into our first pitfall…
It can be overwhelming to select a good platform as the options are far from few. However, this is not the time to avoid doing your homework. Examining a variety of factors can help entrepreneurs decide which platform is best for them and which should be avoided at all costs.
1. What is Your Product?
As the entrepreneur who created the product or idea, this should be the easiest question to answer. However, it is important to be honest with what you have. For example, some platforms work better for creative projects than others.
It is also critical to be realistic with where your product is in the development cycle. If you don’t have a prototype or any sales you may not be ready for certain platforms. You want to focus your attention where you have the best odds of success. Spending time talking to the wrong crowdfunding portal won’t be useful.
2. Has the Platform Worked with Similar Products?
It is important to work with platforms where similar projects have been funded. Seed&Spark may work if you are a filmmaker, but a real estate transaction would be better served at RealtyShares.
Identifying platforms that focus on businesses in your area provides many benefits. The platform may be able to provide some insight as to what investors and backers look for in projects. Possibly most importantly, people who are interested in crowdfunding opportunities in the specific area will frequent the platform. This can be an added bonus when you are building your crowd.
3. What Style of Funding is Available?
Crowdfunding platforms can offer reward, donation, equity, debt, or hybrid solutions. As an entrepreneur it will be important to determine which style best fits your company and needs.
Different funding models may also attract different investors. Platforms offering equity and debt funding may only be available to accredited investors. This may reduce the pool of potential investors and raise the bar for your company regarding the business model, traction and offering documents that are required.
4. What is the Cost?
Nothing is free, and the crowdfunding platforms know they are helping you access capital to grow your business. Perform an analysis of each platform that meets your other requirements. Look at any upfront fees as well as success fees. It is also important to consider if the funding models are all-or-nothing or if you can receive the funds you have raised even if you fall short of your goal.
To be an entrepreneur means that you must be the eternal optimist. You will deliver before the deadline and the product will be better than promised. The problem with this mindset is that reality tends to cause some problems. It is important to layout a detailed roadmap, provide deadlines, and clearly state your goals in your crowdfunding materials.
When raising money from the crowd you should be realist when setting your goals. Your supports will want to know that your goals are achievable and not overly exaggerated. Part of your pitch should include why you are the right person and team for the job.
If you miss deadlines it is important to stay transparent with your supports and remember that honesty is the best policy. People can be forgiving if you are late delivering due to unforeseen or unavoidable circumstances. People who have given you money are less forgiving when deceit is involved.
Crowdfunding works, but a crowd needs to exist and be excited about your business. Entrepreneurs are required to wear many hats and before launching a crowdfunding campaign, the PR and Marketing hat should be frequently worn.
To increase the chance of success start building a buzz around your business prior to launching your campaign. Getting the crowd excited prior to launch will help give your campaign a boost when it finally goes live. Spending 3-4 months building some excitement is time well spent. Launching a campaign then having to rush to bring in the crowd to meet your goal will be stressful and lower your chances of a successful raise.
Discussing compliance post-raise could cause many problems. Prior to entering the market business owners need to understand that selling securities comes with many regulatory requirements. Thankfully, many resources exist that can help. When researching platforms to use ask about prior securities experience, any assistance the portal offers with KYC/AML checks and if they offer investor accreditation services. A quick conversation with a securities attorney may also be in order if you have remaining questions.
Preparing for and launching a crowdfunding campaign can be exciting. The business is preparing to raise funds to take it to the next level. A little bit of research beforehand may help alleviate some of the risks that come along with crowdfunding. If you still have questions, feel free to reach out to our team of licensed investment bankers. With experience in equity, debt, and hybrid capital raises we would love to learn about your project and how we can help you achieve your goals.