How To Crowdfund A Business
The potential benefits of equity crowdfunding are vast. A successful campaign can be truly transformational for startups and growing companies – not only is it possible to raise 6 – 7 figures of equity capital, but it can lead to significantly more attention from everyone in your desired crowd. Many companies also report huge increases in revenue, as a direct result of the exposure their equity crowdfunding campaign brings. The verdict is in: the payoff is huge for those who take the time to learn how to crowdfund.
But, equity crowdfunding also involves hard work, outreach and sacrifice – and that’s before a campaign even goes live! That is why it’s so important to know the process inside-out, before going down this route.
Equity crowdfunding is different to most day-to-day business tasks. It’s hard to get experience. Cast your mind back to your very first attempt at a making a sales call. You were not perfect first time… you may even laugh at the memory of how embarrassingly bad you were. But it didn’t matter, because even if you fell flat on your face initially, you got to try again almost immediately. Each sales call doesn’t take very long, failure is feedback, and improvement can be rapid over a short period. Learning sales has a fast learning loop.
This kind of trial and error is how people normally learn, but this is simply not possible with equity crowdfunding. Companies that experience equity crowdfunding failure do not get a second chance. In the years I’ve been observing the market, I have never seen a company try equity crowdfunding, fail, and later launch again and raise money successfully. You don’t get a practice run, when learning how to crowdfund. You have to get it right, first time.
That is why I put this guide together. It’s important to understand all of the steps prior to starting, because there’s not really any way to get hands-on practice with it. Offers take months to execute, and you only get one shot. Yes, you will inevitably learn how to crowdfund as you go, but it still pays to begin with the best possible preparation. Read on…
1. Set Your Objectives
The first step of how to crowdfund is having absolute clarity over your goals. Whenever you find yourself facing competing priorities and demands for your time, you should return to this question to make sure you remain on course.
The investment money may be your primary motive, but equity crowdfunding offers many other benefits beyond the cash. Know what else you want to achieve, apart from the money. For instance:
- new customers
- strengthening the relationships with your existing crowd
- broaden the shareholder base
- set a valuation anchor, to base future fundraising rounds on
- strengthen governance and shareholder documentation
Keep these objectives in mind to stay motivated. Write it on a post-it note and pin it next to your computer.
2. Take Stock Of Your Situation – Think How To Crowdfund
Once you have solidified your goals, you must test that vision against reality. Just because you want to raise $500,000 doesn’t mean that it is necessarily going to be possible. Look at the resources at your disposal. There are two main ways how to crowdfund:
- You need to either build a large base of raving fans who can give your campaign irresistible momentum, or;
- Large investors lined up already who want to come on board as social proof to others.
If your objectives are mostly aligned with looking for lots of small investors, here are a few questions to be asking.
- How large is your crowd? (Measured by email contacts, social media audience, etc).
- Do they want to invest in you? (If you don’t know – ask them!)
- If not, why is that? And what would change their mind?
Once you know your objective, and what you’ve got to work with, you’ll be much better positioned to know how to crowdfund from there.
3. Survey The Equity Crowdfunding Sites
Making the right choice about which equity crowdfunding site to go with is incredibly crucial. I’ve written a full guide to equity crowdfunding platform selection here. In summary, the choices that are open to you are based on where your company is located. If you’re in the UK, you can use a UK equity crowdfunding platform, but you probably can’t use a USA equity crowdfunding platform. I have also compiled this list of the world’s best equity crowdfunding sites, ordered by country.
Get clear on what each platform can bring to the table. In particular, how big is their investor base, and will they have interest in investing in a company like yours? You want to use a platform with its own investors – new investors, beyond those that you bring yourself. Crowdfunding platforms are meant to be a two-sided marketplace. The smaller platforms simply do not offer this, meaning you’ll effectively have to do most of the work.
Get into discussions with each of the different platforms to ascertain their capabilities. Meet the people who work there, and get them to explain their process, and ask them any questions before making up your mind.
They platform you select will be with you throughout the rest of the process. Look for a platform that shares your values and has a track record of facilitating successful raises like yours.
4. Pitch The Best Platforms
Each platform has their own internal procedure that you will need to go through before your offer can be launched, but they follow a similar pattern. Here’s how to crowdfund a business, in general:
Once you have found your platform of choice, you must submit your crowdfunding pitch materials for review by their investment committee. Depending on the platform, you may be asked to pay an application fee at this point.
There will be a standard set of background checks that must be performed. These might include checking if the directors have a criminal record, that there’s no concern of fraud, and anti-money laundering procedures. Assuming there are no problems here, the next phase will be a commercial evaluation of the company’s readiness for funding. The platform’s investment committee will review the commercial opportunity for suitability to their investor database.
Anyone can list a project on Kickstarter and try their luck, but equity crowdfunding is different. Before an equity crowdfunding offer can go live, the founders will need to convince the platform that they are worthy, using a crowdfunding pitch. This screening process surprises a lot of startups.
The equity crowdfunding campaigns that are shown to the public are only a small fraction of those that apply. The platforms (at least the good ones) all suffer from the same problem: too many pitches. Bill Morrow of Angels Den has revealed that some days they hear 100 pitches and decide to accept NONE of them. Across the industry, only around 10% of companies which approach equity crowdfunding platforms will ultimately have their offers go live. When thinking how to crowdfund, realize that the screening process is aggressive, so just to get to the starting line you will need to beat the odds. You should be clear on why you have decided to raise capital, and why you have settled on equity crowdfunding as the means to achieve that.
The platforms screen out a lot of companies and only list the best ones because they want to gain a reputation for being the platform with the highest-quality deals. If they can gain this pre-eminent reputational position, they will stand a better chance of attracting and retaining a large investor audience and, with that, more high-quality companies will also choose to list on their platform.
The best way to come across as an amazing company in a crowdfunding pitch is, rather obviously, to be an amazing company – one which has both the big idea and has already made significant progress towards turning it into a reality.
But what if the very reason you need to raise money is you need to further develop the idea before it is even possible to bring it to market? Truthfully, you will be expected to show *some* progress. The closer you are to customers and revenue, the better. Working prototypes, existing users (even if they are using your product for free), patents, and patent opinions are the kinds of things that can build your case.
A great crowdfunding pitch can be the difference between getting accepted by the crowdfunding platform, or becoming part of the majority of companies that are screened out. Practice your crowdfunding pitch with friends – ones who know as little as possible about your business. Give your pitch, and then see what questions they ask you. Also, you should ask them questions to test whether they understand what your business does and how it makes money.
If you are invited to pitch in-person to the platform, the pitch can be well-complemented by bringing along a tangible example of your product, or by giving a live demonstration. After you have explained who you are and what you do, your pitch should include some standard sections:
- How large, and how fast-growing is your market?
- What is unique about your company?
- What product categories do you have?
- Do these product categories match the actual needs of the target market you have identified?
- Who are the competitors?
- Who are the people in your company’s team, and have these people succeeded in this sort of business before?
The strongest validation for a platform is the presence of lead investors. A lead investor is a prearranged high net worth or professional investor who contributes a sizable portion of the raise themselves. This gives an offer momentum and validation to the broader crowd. Having a respected lead investor holding a stake in your company will also help a great deal through mentorinf, contacts, and guidance when raising future rounds of capital.
As Crowdcube Co-Founder Luke Lang explains:
“At each level of analysis, we consider whether potential investors will see the proposition as an attractive investment opportunity. Is the company’s vision concise and clear? Is it an exciting and innovative business that people will want to invest their hard-earned money in?”
In summary for this piece of how to crowdfund: explain why your business would make a great investment. Not why crowdfunding would be great for you, or for the business. Why would it be great for investors?
All going well, you will then be issued with an engagement letter, which will contain a number of provisions which you should go through with your lawyer. Once you sign the engagement letter, you are committed to using the chosen platform exclusively.
5. Get Your “True Fans” Primed On How To Crowdfund
An equity crowdfunding launch needs to have momentum if it’s going to succeed. A large crowdfunding platform will be able to provide your offer with some new investors. However, you will only gain the benefit of the platform’s audience if you can generate that initial momentum yourself, with your own investors.
If you expect the platform’s audience to carry you through, you will be disappointed. As a general rule, if you are working with a very strong platform, you might be able to rely on the platform’s audience for around 50% of the money you need, but you will still need to raise at least 50% from your own crowd. If you are working with a smaller platform, you will need to bring even more yourself.
The best way to ensure you’ll have momentum is to build a launch team of your true fans. These are a subset of your crowd – your biggest advocates, your repeat customers, the ones where the relationship goes a lot deeper than usual.
These are the ones you are going to be counting on when your equity crowdfunding launch comes along, so it is essential to warm them up, well in advance of your actual launch. If you contact people and tell them that you’re launching the very next week, it will be difficult to get their buy-in. They might be away, or busy, or just feel like you’ve approached them last-minute.
Instead, involve them earlier in the project and they will feel ownership of the outcome. This is crowdfunding co-creation. If it’s far enough in the future, people will commit to a lot more… because it seems so far away. Then, when the time comes, they will remember that they agreed to do it, and follow-through with what they’ve already agreed to.
6. Prepare Your Campaign
Getting ready for your crowdfunding launch includes crafting your information memorandum, getting all statements checked off during due diligence, getting your initial investors pre-committed, and building your crowd.
This is the phase where the timeline is the most uncertain. If your company already has a good company constitution, the business plan is already in good shape, and there is no legal restructuring work to be done, then your offer could be ready to launch in four weeks or so. But if these issues need to be addressed, it could take much longer.
The other main thing that holds many companies back is their own internal capability to give the platform what they ask for in a timely fashion. Prepare yourself for a full email inbox. If you can give the offer your full attention, and address their requests the same day or overnight, then it will make a huge difference to how quickly you can go live. If it takes you several days to respond to each information request, the timeline will quickly blow out.
The preparation phase will also involve you preparing your marketing plan. When it comes time to actually launch your campaign, you already need to have a clear idea of how you are going to reach out to your crowd.
7. Marketing: The Surround-Sound Effect
You can take as long as you need to launch, but once you have pushed the “go live” button, the clock is ticking. There is still a lot to do – you will need to keep the momentum going by executing on your marketing plans, providing frequent updates, and staying on top of the Q&A forum. These are all important aspects of how to crowdfund.
The most important times for your offer will be the first week and the last week, as history shows that this is when the bulk of the money will arrive.
The key to making a big splash with an equity crowdfunding launch is to make it visible across multiple different channels – what I call the “surround-sound effect”. People who see your company mentioned just once will probably ignore it, but the more times they see it, the more curious they become. They’ll start to recognize your company, and eventually, want to know what it’s all about.
It’s the same reason why big brands employ a multi-channel marketing strategy. They don’t just put all their resources into advertising in one place – they make sure to appear on TV, in newspapers, subway billboards, sponsor elite athletes, and so on. It all helps to build recognition.
Some of those types of channels that multinational companies use are likely out of your reach, but the same concept applies. You don’t want to rely entirely on Facebook advertising – you want to use your email list, in-person outreach, appear at events, and other places too.
I hope you found this information on how to crowdfund a business valuable! If you’re interested in learning more about the potential of equity crowdfunding, the next step is to watch my equity crowdfunding video training walk-through, which readers can access for FREE by clicking here -> The Free Equity Crowdfunding Training.
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