Equity Crowdfunding: Lessons From the Field
Raising money is a time-intensive process. Marketing your securities offering online through equity crowdfunding can shorten the process. For those of you who feel trepidation about dipping a toe in the water, knowing why others have taken the plunge and learning from their experiences may encourage you to raise money publicly.
Before diving into these lessons, let's start with some background. In 1933, the Securities and Exchange Commission (SEC) put rules and regulations into effect to protect unsophisticated investors from getting bilked. This included prohibiting private companies from advertising their securities offerings.
On Sept. 23, 2013, Title II of the JOBS Act was put into effect, including Rule 506(c), which enables private companies to market their offerings to accredited—think "wealthy" or "sophisticated"—investors. With the 2013 rule in place, private companies are able to take advantage of marketing their securities offering via a crowdfunding platform.
Two companies that recently raised money this way shared insights into their campaigns.
- Digitzs is the fastest, easiest and most secure way for merchants who can't swipe cards or use shopping carts to get paid. Its first product is aimed at SaaS platforms that facilitate payments for merchants. Founder Laura Wagner is a serial entrepreneur in the payment processing space with previous experience successfully raising money. For Digitzs, she managed to raise $375,000 from friends and angels, but was finding it much harder to raise money than in the past for a pre-product, pre-revenue company. Many angels—and especially venture capitalists—have moved upstream to focus on funding later stage companies. Wagner needed to reach investors interested in the seed stage; crowdfunding helped her get there. Digitzs has received more than $2 million in commitments via Crowdfunder.
- Onevest is more than just an equity crowdfunding platform. While its mission is to connect founders to capital, the service also offers matchmaking expertise in finding co-founders and business partners through CoFoundersLab, which it acquired through a merger. CoFoundersLab has partnerships with 21 major startup hubs at universities, accelerators and incubators. Tanya Prive and Alejandro Cremades, who started Onevest, had already raised $3.3 million from Fortify Ventures and others, and were in the process of raising money for their Series A round. “Part of raising our own round was learning lessons," says Prive. "We wanted to eat our own dog food.” What they learned will shape product improvements to the Onevest platform. Onevest also received commitments of more than $2 million. And the company did, indeed, “eat its own dog food.” It raised the funds on its own platform.
Here are more valuable lessons from Digitzs and Onevest to keep in mind as you think about whether equity crowdfunding is right for you.
A Crowdfunding Campaign Extends Your Reach
Doing a crowdfunding campaign allows you to reach your connections' networks with efficiency, says Cremades. Investing in your company may not be a fit for the people you know directly, but your direct connections may make a referral if they hold you in high regard and know someone who is a fit.
Many crowdfunding platforms have the ability to highlight your company to investors already on the platform who would have an interest in also investing in your company. “Overwhelming support came through on the platform,” Prive said in Bankless Times. “Many of the people who were familiar with Onevest came on board.”
Crowdfunding Shortens the Length of Time It Takes to Fundraise
Raising money in the offline world can take seven to 12 months and sometimes even longer. On average, it takes four to six months on crowdfunding sites, according to Luan Cox of Crowdnetic, which aggregates data from 18 equity crowdfunding platforms including Onevest. It took Digitiz four months to reach its goal. Onevest achieved its target in one month.
Choosing a Crowdfunding Platform
Cremades recommends choosing a crowdfunding platform from among those that specialize in your sector and stage of business. Digitzs founder Wagner recommends looking at the platform’s track record. Ask for references to help you judge the platform’s customer service.
For more evaluation criteria and a list of crowdfunding platforms, read Stand Out In the Crowd: How Women (and Men) Benefit From Equity Crowdfunding.
Nothing Worth Having Comes Easy
Just because you’re listed on an equity crowdfunding platform doesn’t mean people will flock to you. It takes a lot of hard work to publicize your offering and attract potential investors. Wagner hired a marketing and public relations firm, and had a video professionally made. Fundraising takes effort and doing it within a condensed time period is even more intense.
You don’t just need to hook an investor. You need to reel him or her in. “There’s a lot of follow-up that you need to do with investors,” says Cremades. Following up can be through email, phone or in-person if the investor is nearby. Whichever way you choose, do it in a timely fashion. Have all of your due diligence documents done in advance in case your follow-up wants to see them.
Digitzs kept potential investors in the loop by showcasing its achievements. This was done to also show how its funding activities were gaining traction. These achievements included:
- Being listed at number five on CNBC's Crowdfinance 50 Index
- Securing $1 billion in verbal processing commitment
- Cementing a strategic deal with one of the largest banks in North America
- Attracting a top notch management team that includes the head of payments at Visa and Apple, the CFO at PayPal, the COO at Kount and more
Investors Measure You by the Investors Who Have Invested in You
As an entrepreneur seeking investment, you may be known by the company you keep. Attracting heavy-hitting investors early on can contribute to your success in attracting others.
Digitzs was able to get Kevin Harrington, one of the original sharks on Shark Tank and founder of As Seen on TV. He's a principal architect of the infomercial industry who understands the pain points within the payment processing industry. For Digitzs, getting Harrington was quite a coup, says Wagner.
Details That Get Lost In the Crowdfunding
You also need to be aware of some of the drawbacks of crowdfunding:
- Not everyone who tries to raise money actually succeeds in doing it. The odds in the offline world are about one in five that you will succeed, according to the Center for Venture Research, which tracks angel investments. The percentage is similar in the online world, according to Crowdnetic, which is a database of information from 18 crowdfunding platforms. The big difference is that, in the online world, lots more people will know that you haven’t succeeded.
- Not everyone who commits to giving money ends up actually giving it. You might also get a commitment from someone who doesn't meet accreditation standards. Each possibility can be a rude awakening.
- Whether you raise your money through an online platform or though offline means, you still must verify your investors' accreditation. Some online crowdfunding platforms, such as Onevest, provide this service for free. Others may not.
Best practices for publicly raising money are emerging. Facts are replacing misconceptions and the industry's progress is being measured. You can find more in Stand Out in the Crowd and here on QuickBooks' Small Business Center, where I will write regularly about best practices.
Learning from the experiences of entrepreneurs who have successfully—or even unsuccessfully—raised money via equity crowdfunding will put you ahead of the crowd if you decide to jump in.