Fundraising Mastery: Equity Funding

Last time we looked at debt funding, which is money you borrow that you need to repay to your lenders. Now we are moving to equity funding, which means selling shares in your company. This money does not get repaid, but your investors will expect a return in future when the company is sold, and they achieve an exit. It also means you won’t own 100% of your company. 

We’ll start with crowdfunding.

Crowdfunding enables companies to raise money from a large number of people – i.e. from “the crowd”. Typically, individual investments range from $10 to tens of thousands. Crowdfunding has changed the rules of the fundraising game.

The UK leaders for equity crowdfunding are Crowdcube (www.crowdcube.com) and Seedrs (www.seedrs.com) . No matter where you live, you only need to Google “crowdfunding” to find a multitude of sites, which you can use to raise money.

Register on these sites as if you were an investor. Take your time and do your research. Have a look at other companies that are raising money on the site. Learn what works and what doesn’t by reviewing both companies that are doing well, and those that aren’t succeeding. Perhaps their business plan is not sound, their video needs work or the market for their product doesn’t exist. 

Crowdcube and Seedrs have serious vetting processes, which include testing your business plan and assessing whether there is, in fact, a market for your product. I have helped clients raise money with Crowdcube in the past and have been told that only one in three companies that applies actually passes the vetting stage. Statistics on the Crowdcube site indicate that only 60% of companies that make it through are successful in completing their funding. I’ve seen companies make it through the vetting stage but not complete their raise.

Provided it has a solid business plan and a clear vision, even the smallest startup can successfully raise money through crowdfunding. Perhaps you haven’t made your product yet, but you are confident of the market. As long as you have clearly laid out your plan and the milestones you hope to achieve, crowdfunding can be for you.

Several years ago, I raised $150,000 on Crowdcube for a client whose product was not yet complete. We built the plan and had a base of customers lined up who had paid advance deposits towards the product that was being offered, but to make it happen they needed additional cash and decided to sell equity. It’s not as fast as debt funding, but from start to finish it took just over five months until the cash was in the bank and the company completed the product. In the years that followed, that company raised a further $250,000 from the investors who had come in during the Crowdcube round.

By its nature, equity crowdfunding raises money through a multitude of investors. This, paired with the relatively low sums invested, means that companies tend to maintain a large degree of control. Done right, crowdfunding is an accessible way for SMEs to raise money through debt or equity, and to raise awareness at the same time.

Businesses will have the names and contact information of their investors and will update them on progress and development, but essentially, the investors are not involved in the day-to-day business. The investors pay in money and are given shares in return. This is in contrast to angel investors, venture capitalists and private equity firms, who tend to have far more control over business strategy. 

More on those investors in our next few posts.

As always, looking forward to reading your thoughts and questions in the comments. 

With love and gratitude,

David