For most companies, fundraising is a vital part of growth and crucial to operations when working towards the next milestone. When fundraising, a number of important decisions can present themselves around how and from whom to raise capital. Those decisions generally fall into two buckets: What will we sell to raise capital? Who will we raise capital from? The most common assets companies sell to raise capital are equity and debt. More recently, some companies have chosen to sell cryptocurrencies, tokens, or non-fungible tokens (NFTs) have also become methods of raising capital. Additionally, companies may decide to raise from accredited investors or the crowd (non-accredited investors) or a combination of both. Pros and cons exist for both investor types, and it’s up to each company to decide for itself how it can draw from the two. But we’re here to zero in on one particular method: crowdfunding.
Crowdfunding is the practice of raising funds from the general public. Most often, these crowdfunding raises or “crowdfunding campaigns” as they’re called are funded by non-accredited investors at smaller investment amounts compared to institutional or accredited investors. Furthermore, there are usually many more investors in a crowdfunding round than in an institutional round. These campaigns can only be accessed via equity crowdfunding portals where fundraising goals are announced and tracked, often within a specific time period.
How does one know when crowdfunding suits a company’s needs, and is there a right time in a company’s fundraising journey to do a crowdfunding round?
Successful crowdfunding campaigns take considerable time and resources to plan. A good degree of marketing and campaign management is required to create awareness around the raise and convert curious investors into check-writing investors. We’ve outlined the major lifts below.
Fundraising will cost time, especially when big donors are involved. Due diligence and decision-making will often take months. Even when investors are not in the picture, the company itself will need to allocate much of their work time into campaign efforts.
Fundraising will cost money, even for short-term, small campaigns. It may involve legal fees, accountants, admin duties, additional manpower, third-party support, printing, advertising fees, insurance premiums, bank audits, and so on. Getting these costs down as much as possible will increase the benefits of the campaign's margins.
Fundraising will require commitment. An investor relations team within the company will need to dedicate a significant portion of their energy into keeping the campaign up and running. Mismanagement or neglect of campaign updates and forum discussion momentum may lead to negative campaign performance.
Fundraising can reflect negatively on your company if the campaign goes poorly. Especially in the Information Age, a company’s reputation can suffer with negative press. The bottom line is: fundraising needs clarity, requires strategy, and demands fortitude.
So why do a crowdfunding campaign at all? Raising from traditional venture capitalists has its drawbacks including relinquishing board seats, unwanted influence in company decisions, and lack of operational support from milestone to milestone.
This is where crowdfunding can offer more. Crowdfunding enables the company to set the stage, the program, and the audience. And, if successful, the crowd can be tapped over and over for resources in sales, talent, advising, as few examples.
Having more control over the fundraising comes with its own challenges.
Defining the stage: Selecting the right portal for your campaign is important. How accessible and familiar is the portal to your target audience? What sort of campaigns are the platform best suited to hosting? How secure is the funding on their portal?
Defining the program: In addition to equity, what can your company offer investors in exchange for their investment? How can you incentivize investors to maximize investment? How can investors be reassured their money is being used as intended?
Defining the audience: Who is your ideal target audience? Given equity crowdfunding is a huge marketing lift, it’s extremely important you get the audience right. What you want to identify is your ideal investor–that person who needs little convincing of the efficacy of your product, understands the problem you’re solving, and is eager to grow with you. Then, find that person en masse (meaning, find a lot of them). Marketing without a target audience or audiences can prove to be costly with little benefit to your campaign.
Understanding the risk/benefit relationship of raising from the crowd is a healthy start to having a successful equity crowdfunding campaign. Lowering your risk will help maximize investment and optimizing to the crowd’s strengths can only help your company reach its next funding round.