Running a successful equity crowdfunding campaign is hard work and good marketing strategy is vital.
Equity crowdfunding has become a popular way for entrepreneurs to raise capital to fund business ideas and/or make real estate investments.
It offers several potential benefits to both entrepreneurs and investors, many of which are more appealing than simple bank financing. In fact, if you have an idea for a new business idea or real estate investment, equity crowdfunding might be a way for you to raise the money you need.
But before you do that, you’ll have to take some time to figure out whether equity crowdfunding is right for you. Equity crowdfunding isn’t a free ride. It requires extensive planning and careful execution. Keep reading Benzinga’s guide on how to run a successful equity crowdfunding campaign to find out whether this is the right way for you to raise capital to fund your new venture.
What is Equity Crowdfunding
Equity crowdfunding is a way of raising capital for a business venture where an entrepreneur offers equity to would-be investors in exchange for future equity in the venture. Equity crowdfunding investment offerings became open to nonaccredited investors in the United States beginning in 2016 with the passage of the Jumpstart Our Business Startups (JOBS) Act. Prior to that, startup investing was limited to accredited investors or family members of whoever founded the venture.
Learn more about What is Equity Crowdfunding here:
How to Launch an Equity Crowdfunding Campaign
One of the easiest ways is simply contact a portal and express your interest. Portals are selective, so you might need to apply to several before you will actually get accepted. Once accepted, it's important to hit the ground running to make sure it's successful. If you're looking to launch an equity crowdfunding campaign for your startup, here are links to the top three portals to get you started.
- Sign up here to Launch on StartEngine, the #1 Equity Crowdfunding portal in the U.S.
- Issuers can use this link to sign up here for $2500 of Fees off your Wefunder raise
- Republic is the #3 portal in the U.S. and another great option to raise funds.
It's important to research the portals, as they all have their pros and cons. Further, these are all exclusive portals, with many denying as much as +90% of the companies that apply. But if you get denied on one, there's nothing stopping you from launching on another, and you're likely to get accepted to at least one portal. So if you don't launch on your first option, then come back and try for another.
Advantages of Equity Crowdfunding
Equity crowdfunding offers several potential advantages to both entrepreneurs and investors. In the case of entrepreneurs, servicing debt on bank loans is expensive. Every nickel paid in interest is less profit, and any venture servicing long-term debt is less attractive to investors.
Debt service on a bank loan requires payments on a fixed schedule that a startup business may not be able to meet. If it can’t meet these obligations, the business goes bankrupt.
Restrictive payment terms, and the fact that many startups may not have enough collateral to satisfy bank underwriters, are not necessarily issues with equity crowdfunding. The fact that the entrepreneur is trading equity in the venture for the funds they are raising means there is no debt to service. If the venture works, the investors are partners for the profit, but there is no guarantee of payback or success.
This is also why equity crowdfunding opportunities are so enticing for investors. Because they’re taking riskier bets on unproven business ideas (or undervalued assets), they’re allowed to demand an equity share that will make them more money than loan returns. It’s one thing to finance a company and get 5% of the loan, but it’s quite another to actually own 5% of the company. Successful equity crowdfunding deals give entrepreneurs passive income for life.
Venture Capital vs. Equity Crowdfunding
Equity crowdfunding may sound a lot like venture capital, but there are some significant differences between the two.
Crowdfunding allows the startup to set much more favorable terms in exchange for capital. The reason for this is that it’s the business venture — not the venture capitalist — who sets the terms in an equity crowdfunding deal with regard to how much capital for how much equity.
By contrast, in a venture capital deal, the venture capitalist dictates those terms to the business. The venture capitalist may say, “I will invest X amount of dollars in exchange for Y equity percentage.”
Most venture capitalists want a significant share of equity — sometimes even more than 50% — in exchange for their investment. They may also demand a degree of authority as decision-makers, meaning the startup owner may have to sacrifice control of their own business in exchange for the capital.
Equity crowdfunding opens many startups to a much larger pool of potential investors. The world of venture capitalists is lucrative but relatively small. Additionally, many venture capitalists specialize in a particular type of industry such social media or biotech, which only serves to shrink the potential investor pool even further. An equity crowdfunding offering is open to any investors who meet the capital, residency and accreditation requirements detailed in the offering.
How to Run an Equity Crowdfunding Campaign
The first step in running an equity crowdfunding campaign is identifying a business idea. The remainder of this article will focus on running a real estate crowdfunding campaign, but there will be enough crossover in the steps that you’ll still get a good understanding of how to run a campaign for any startup.
Plan
Once you have identified a business you want to start, the next step is coming up with a plan. This is perhaps the most important step because, without a good budget, you won’t be able to project profits. If you can’t project profits accurately, you can’t reliably figure out how much money you and your partners will have to make. Examples of the line items in your budget should include:
- Total cost of launching an equity crowdfunding campaign
- How much funds your network will contribute to the raise
- Research and development costs
- Employee wages
- Marketing
- Annual cost of space rental for office/base of operations
- The price per share or amount of equity your investors get with their contribution
- Annual cost of professional services such as management fees, accounting and legal services
- Cost of any needed equipment like computers, software and office furniture
- Projected annual revenue
- Expected exit time frame for startup
Offering Memorandum
This document outlines all the relevant aspects of the business or startup. The offering memorandum includes any relevant information about the company. Examples of the information you might find in an offering memorandum include:
- A complete description of the startup’s operations
- Financial statements for the startup
- Biographies of senior management staff
- Management structure
- Plan for use of investor capital
- Profit projections
- Capital structure
- Risk factors associated with the startup
- Compensation for startup staff
- Legal disclaimers
Once you launch your raise, it's all about marketing and raising as much money as you can. There are several ways to marketing your equity crowdfunding raise to make sure it's successful, to include:
- Invest your own money: Get Your Own Skin in the Game
- Work your personal network to find investors
- Work outside your personal network to find investors
- Online ads on Google, Facebook and other platforms
- Contracting agencies to raise funds on your behalf
- Raising funds in your local community through traditional advertising such as print and radio
- Television advertising
- Press releases
- Hiring a public relations agency to generate press.
- Arrange for featured appearances in national and local publications or media outlets
Get Your Own Skin in the Game
In many cases, you will have to put up some of your own money to justify your equity in the deal. This is especially true if you want to be the general partner. It’s exceedingly rare that you’ll be able to start a business, then have it 100% crowdfunded by investors who will all just trust you to do the right thing.
Whether it’s a real estate asset or a business venture, few people are going to finance a venture you aren’t backing with any of your own money. Would you invest in an asset or an idea that needed 100% financing knowing the person running it doesn’t have a personal stake in the venture’s success?
Even if you’re not doing real estate, getting investors with nothing more than “sweat equity” will be a tall order. That’s just the reality of crowdfunding. If you’re not prepared to be part of the “crowd” doing the funding, or more to the point put up a lion’s share of the funding, your chances of getting the money you need are minimal.
Work Your Personal Network to Find Investors
This is where the proverbial rubber meets the road in your equity crowdfunding plan. Start your search for investors by using your own network of personal contacts. If you’re already known to them as an entrepreneur or real estate investor who has succeeded in the past, and you have contacts with investment capital, pitching them on your equity crowdfunding deal may not be difficult at all.
On their first day of work, most successful stockbrokers or commodities traders are told to write down a list of 10 family members or friends to approach. The reality is that if you can’t convince people who already know and trust you to back you with their hard-earned cash, getting the money you need from strangers may prove to be even more difficult. This will also give you an opportunity to refine your investment pitch.
Be prepared for rejection — lots of it. More importantly, be prepared for questions. No matter how well your business plan is laid out, when you start pitching equity crowdfunding ideas in real-time, you’ll be hit with questions you didn’t even know to ask. The better you get at answering them, the better you will become at pitching your idea, which translates to a higher chance of eventually getting investors to say, “Yes.”
Working Outside of Your Network to Find Investors
If you can’t raise enough money in your personal network to fund an equity crowdfunding campaign, you still have options. Before the advent of online equity crowdfunding platforms, entrepreneurs were largely limited to their personal networks to raise funds. This is great for the well-connected, but not so much if you aren’t.
In the case of real estate, most equity crowdfunding platforms are on the lookout for new opportunities. The platform you choose will depend on the kind of investment you’re looking at. In the case of institutional-quality real estate, platforms like RealtyMogul, Yieldstreet, Fundrise and CrowdStreet are all potential outlets. Bear in mind that each has its own due diligence and project requirements.
If you’re looking at a single-family home or vacation rental property, Arrived Homes or Here both offer crowdfunding for smaller properties.
In the case of a startup or business, StartEngine, Republic and Wefunder are all reputable platforms that have had tremendous success for entrepreneurs raising money in the past. Appearing on these platforms will give your venture invaluable exposure and increase its credibility, but that's not enough alone.
Marketing Techniques
Your ability to market and publicize your crowdfunding campaign will be essential to its success. The more potential investors you can expose yourself to, the more likely it is your equity crowdfunding campaign will achieve its goals. Examples of marketing techniques that may be useful include:
- Online ads on Google, Facebook and other platforms
- Contracting agencies to raise funds on your behalf
- Raising funds in your local community through traditional advertising such as print and radio
- Television advertising
- Press releases
- Hiring a public relations agency to generate press and arrange for featured appearances in national and local publications or media outlets
Benzinga also offers several marketing solutions that may help you increase your exposure to potential investors. Overall, the key is more is better. The more aggressive you are with your marketing, and the more precisely you can target your potential investment pool, the better your chances of hitting your funding goal.
SEC Approval
Equity crowdfunding offerings must meet specific guidelines laid out in the JOBS act and other government regulations. Before you can begin seeking investors, you must have your campaign approved by the Securities and Exchange Commission (SEC). This can be a protracted and lengthy process with many statutory requirements. It may be helpful to hire management staff or legal counsel who has experience with this process if you have not already run successful campaigns.
It’s Hard Work
Equity crowdfunding is a great way to raise money for a venture for any entrepreneur who doesn’t want to go with institutional lending or financing to raise funds. The rise of online crowdfunding platforms has also opened this type of fundraising up to people who may not have always had access to it.
But it’s still a lot of work. Identifying real estate assets that will turn enough profit to make it viable for equity crowdfunding isn’t easy. Investors will be looking for passive income at a rate that exceeds bank interest. They will also be looking for equity shares that make an appreciation payout worthwhile, especially in a case where their money may be illiquid for several years.
The same thing holds true for a startup. You’ll still need to put in a significant amount of legwork to create a business viable enough to meet the requirements of any equity crowdfunding platform. The reality is most of them reject more than 90% of the applications they receive. But if you do that work, you just might find yourself on the road to success. Plan ahead, work hard and good luck!