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Equity crowdfunding is an increasingly popular form of venture financing that takes place primarily online. Equity crowdfunding platforms primarily function as a place where investors can discover investment opportunities and purchase an equity stake in those companies by participating in a funding round. Because equity crowdfunding platforms cultivate a community of qualified investors, they are a great place to discover and close investment from investors outside your direct network.
Unlike reward-based crowdfunding sites like Kickstarter or Indiegogo where backers get a reward (like a product) in exchange for money, on equity crowdfunding sites backers get actual ownership in the company in exchange for their support.
There are numerous equity crowdfunding platforms to choose from. No matter what equity crowdfunding platform you select, the mechanics of running your crowdfunding campaign will be similar. Just as there is a formula for success on Kickstarter and Indiegogo, there are steps you can take to increase the likelihood of success raising on an equity crowdfunding platform.
Let’s dive into our top tips for successful equity crowdfunding.
Prepare yourself legally
There are many rules and regulations about who can invest in startups, how they can invest, and how you can market to them. In general, most equity crowdfunding is still restricted to accredited investors. However, these regulations are changing quickly, and you should always get legal counsel before diving into an equity fundraising campaign.
Pick the right platform for you
Equity crowdfunding platforms are a great place to showcase your traction.
There is no definitive right or wrong answer when determining the best equity crowdfunding platform for your raise, but let’s cover what you need to know to make an informed decision. The four primary criteria you should evaluate equity crowdfunding platforms against are: curation, legal structure, and investor community.
Arguably, the three most popular online crowdfunding platforms are AngelList, SeedInvest, and FundersClub. Let’s look at the pros and cons of these platforms as they relate to our four assessment criteria.
Curation
Some equity crowdfunding platforms curate the deals that can fundraise on their platforms. Others let anyone participate. Being part of a curated group can add prestige to a fundraise, and curated groups tend to have a vested interest in the success of the deals they choose to feature. AngelList is an open platform where anyone can post their fundraise.
One way to differentiate on AngelList would be to get backed by a syndicate on the platform, as syndicates do curate their deals. SeedInvest and FundersClub, on the other hand, are curated platforms; you need to be selected by the platform in order to raise.
Legal structure
As we’ve discussed, there are many ways to structure startup financing. Equity crowdfunding platforms don’t all structure investments in the same way. It’s important to understand the legal structure and implications of a platform before diving in. SeedInvest and AngelList let investors invest directly into companies on the platform. FundersClub, on the other hand, joins individual investors together in a single purpose vehicle built for investment in your company. As we’ve discussed previously managing many shareholders on a cap table can be tedious, so the single purpose vehicle model or FundersClub removes that complexity.
Investor community
The size and makeup of a platform’s investor group is very important, because it determines the possible reach of your campaign.
Equity crowdfunding platforms are social networks. You want to get backed by the most influential users.
To date AngelList, SeedInvest and FundersClub are exclusive to accredited investors and US companies, but it is expected that many will start allowing non-accredited investors to take part in a portion of their deals in the coming year. Canadian-based Frontfundr is a platform already accepting non-accredited investors. Using a platform that is open to non-accredited investors could lead to less sophisticated investors taking part in your round, but could also dramatically increase your possible investor pool.
AngelList has the largest community of investors and entrepreneurs, but SeedInvest and FundersClub (curated platforms with fewer deals) tend to put more marketing power behind the deals on their platform. If your company is not well-known enough to stand out against all other startups in an open equity crowdfunding environment, working with a curated platform might be to your advantage.
It’s possible to make your deal available across multiple equity crowdfunding platforms. However, by doing this, you risk cannibalizing your success on all platforms. It’s generally better to put all of your efforts towards one platform at a time. To the same end, avoid raising both online and offline at the same time.
Follow other deals
A great way to learn what works and what doesn’t in an equity crowdfunding deal is to follow other companies. For at least a couple of months before you start raising, actively engage with other companies raising online through the various platforms.
If you are an accredited investor yourself, you’ll be able to not only see public updates, but also investor updates. Even if you can only see public updates, you’ll still be able to get a sense of the tactics companies are using to market their deal and the pace of their raise. Take note of how each platform varies, what works and what doesn’t, and implement your learnings during your raise.
Work directly with the platform
Most equity crowdfunding platforms will work with entrepreneurs personally to help them craft their campaigns, particularly if they are excited about your product. Find out who the key employees managing community at your selected platform are, and reach out directly to tell them about your campaign plans.
Use metrics and past investors to get them excited. While some equity crowdfunding platforms like AngelList don’t make you get approval before publishing a raise, it’s in your interest to get their support before listing, as it could lead to great advice and more exposure for your deal.
Create a great deal room
Once you’ve selected a platform, you will develop sales copy describing your opportunity. You’ll note how much you have raised to date and how much you intend to raise and create a public version of your deck. This information will be entered into the platform to create your “deal room,” the place investors go to review your investment opportunity. Fully complete your deal room and ensure it is accurate and complete. On AngelList in particular, many investors search for investment opportunity by industry or interest, so be sure to accurately describe your company and take full advantage of tagging functionality.
Time the crowdfunding portion of your raise carefully
Your deal room will start as a private draft and you will need to decide exactly when to make your investment public to the investor community.
Timing when you make your deal room public is incredibly important. Equity crowdfunding is all about momentum. Don’t publish a raise on equity crowdfunding starting from $0 raised, you need to show other investors that there is already interest. A good rule of thumb is to only publish your deal on an equity crowdfunding round after half the round is already raised, using it to fill in the rest of the round, rather than to kickstart the round.
Get backed by influencers on the platform
Equity crowdfunding platforms are social networks. You want to get backed by the most influential users on the platform early on, in order to get maximum exposure for your deal. Target these influencers before you even publish the deal, and have them soft committed to the round before it goes live.
Take advantage of syndicates
On AngelList, not only can you get backed by individual investors, but you can also get backed by an online syndicate lead. When a syndicate lead backs you, your deal will be sent out to all of their followers. This can be very strong positive signalling and lead to a much faster raise than going out on your own.
Notable syndicates are run by the founders of AngelList, Shark Tank’s Barbara Corcoran, and 500 Startups.
Line up your initial backers
In addition to having momentum when you go into the online portion of your raise, you should also have your first equity crowdfunding backers lined up before you go live. Take offline commitments for your equity crowdfunding raise, let these investors know when you plan to go live, and aggressively collect those commitments on the first day of your raise. An initial rush of investors when your deal goes live will create social proof for other investors considering the deal.
Be data focused
Equity crowdfunding platforms are a great place to showcase your traction. Because there are fewer personal points of contact, investors’ personal biases are often forced to take a back seat when reviewing deals online. So, your business can more than ever speak for itself. If you have traction, strong growth, great deals in the pipeline — be sure to make that a major focus of your online pitch.
The following post is adapted from Katherine Homuth’s book Funded, now available through O’Reilly Media.
Photo via Unsplash
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