Raising Funds from Small Investors

You’ve developed a good business, but you now want to scale it from boutique to growth. To do this, you need to invest. In technology. In people. In equipment. In premises. None of these things come cheap. Should you consider equity crowdfunding?

You want to grow your business, but you need funding

The problem you have is that the traditional ways of funding your business growth don’t appeal to you very much:

  • Even in the current low interest rate economy, banks want their pound of flesh – on the verge of criminal in many cases. Plus, you must jump through hoops to be approved for a business loan, and when you are, there’s a bunch of restrictions placed on you.

  • You’ve considered venture capital funds. But they also want their pound of flesh. Not only this, but they will also tell you when they want it. They dictate the timetable to which you must stick. In this current climate, who knows what obstacles you will be challenged with next?

  • Angel investors may be an option, but, like venture capitalists, they want an exit strategy to realize profits. If you plan to grow and run your business forever, then an angel investor won’t be the best suitor for you.

  • Family and friends might be an option, but do you really want to get on that emotional roller coaster? What if circumstances change and Uncle Bob wants his investment back?

You’re stumped. Do you stay boutique in business the rest of your days? How can you fund the growth that you know is possible?

Welcome to equity crowdfunding

Equity crowdfunding is a way to obtain funds from your peers. Ordinary people and small investors – the ‘crowd’ – who, like you, have decided now is the time to be brave in business. It started as a method to raise money to finance projects and businesses. 

For example, if you want to record, produce, and promote a music album, you might crowdfund it. In return for a ‘donation’, a donor would receive, say, a signed copy of your album. For a large donation, you might sing at the donor’s wedding and present them a signed copy of your album.

Equity crowdfunding works in a similar way, except that, instead of a product, service, or personal appearance (or whatever your ‘gift’ might be), you raise funds in return for equity (shares) in your business.

Before we look at how to equity crowdfund your business growth, let’s look at the history of this funding method.

Jumpstarting businesses with crowdfunding

In 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. This loosened the laws on how small businesses could raise money, and allowed equity crowdfunding to be developed.

In 2015, the SEC relaxed regulations on how small, private investors could invest in early-stage companies – and this has led to these smaller investors being able to take part in equity crowdfunding. They can now invest in businesses like yours.

Equity crowdfunding is an investment

Equity crowdfunding enables investment into your business. Here’s how it works:

  • You put a valuation on your company

  • You ‘advertise’ your company on an equity crowdfunding platform

  • In the funding round, you raise funds for a percentage of your company, based on your valuation

  • You issue equity to interested investors

You get the funds you want, and your investors participate in the growth of your company. As the value of your business grows, so too, does the value of each investor’s equity holding. Investors realize their profits when you either sell your company or floats on the stock market.

You raise funds on equity crowdfunding platforms

Even though this is a less regulated market, it is made possible by platforms that connect you to potential investors. There are three types of equity crowdfunding platforms:

  1. Intermediaries

  2. Portfolios

  3. Advertisers

Which you use depends upon your goals and preferences.

  1. Intermediary equity crowdfunding platforms

This type of platform acts as an intermediary. Typically, investments made can start from as little as $1,000. You pitch to investors on the platform and the platform holds investors’ money in escrow. When all funds have been raised, the funds are released to you and each investor receives shares in your business.

  1. Portfolio equity crowdfunding platforms

This type of platform operates as a fund, enabling small investors to own a portfolio of growth or startup company shares. Usually, these portfolios will cover a single asset class – such as real estate, for example. The investor gains exposure to a sector they want to invest in, while mitigating the risk of investing in a single company.

  1. Advertisers

On these platforms, you simply advertise that you are raising funds in exchange for equity. Small investors can decide whether to invest. If they wish to invest, they make a pledge to you to do so within a specified time. You then connect with the investor outside of the platform, arranging transfer of funds and equity between you.

In all three platform types, you usually must pay fees to list or advertise. Some require investors to pay management fees, too.

Before equity crowdfunding your business, consider these pros and cons

It’s not difficult to equity crowdfund your business – providing, of course, your business is attractive to investors. However, before you rush to take advantage of this option, you should understand the main pros and cons.

The pros of equity crowdfunding

The five main advantages of equity crowdfunding are:

  1. Easier access to capital, with access to thousands of potential investors

  2. You could raise substantial sums more cost-effectively than through other funding routes

  3. You don’t need to provide collateral 

  4. Investors may serve as business advisors to you

  5. Equity crowdfunding is available to smaller businesses

The cons of equity crowdfunding

There are a few disadvantages of equity crowdfunding, too. The main ones are:

  • You give up some of your business in exchange for capital (effectively, this becomes the collateral)

  • You must prepare a professional and appealing pitch

  • You will need to pay fees to the equity crowdfunding platform (sometimes monthly fees)

  • It may take a long time to raise the funds you seek

  • You’ll need to manage many small investors

There are some restrictions on how much you can raise in any 12-month period. Regulation A of the JOBS Act sets out two tiers for fundraising:

  • Tier 1 – in which you can raise up to $20 million in a 12-month period

  • Tier 2 – in which you can raise up to $75 million in a 12-month period

There are also some ‘bad actor disqualification’ rules, which bars certain people and businesses from raising funds.

Success is knowing

I seriously wish that this funding route had been available when I was growing my business. Who knows, I may still use it, for all the advantages that it offers. One thing I do know is that whatever funding route you decide to take, you really must get advice.

You see, each platform has its own specific benefits. They all have particular rules, different charging structures, and different audiences that they target. That’s why I haven’t recommended any individual equity crowdfunding platforms in this article. You must do your own research and discover the best option for you – success is knowing, after all.

As a starting point, you might want to visit findcrowdfunding – and start on your road to equity crowdfunding your business growth.

In the meantime, why not book me for your next virtual or physical event? I’d be happy to provide guidance and motivation. But be warned: as a no-nonsense mentor and coach, I tell it like it is!

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