Most entrepreneurs who seek to fund their businesses through equity crowdfunding are destined to fail. Yet for early-stage and established companies alike, the opportunity to raise equity capital through crowdfunding has never been better.
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Those may seem like contradictory declarations, but in my experience the difference between a successful crowdfunded business and another cautionary tale comes down to a few crucial decisions.
I've played a key role in starting and building six successful technology companies, and have made angel investments in dozens. I have raised venture capital from blue chip VCs, and served on the senior management team of two hot companies that completed initial public offerings (IPOs). I've observed and evaluated hundreds of company business plans launched through a wide variety of funding. In my current role at the helm of Manhattan Street Capital raising equity capital via Regulation A+ (Reg A+)—a specialized form of equity crowdfunding—I am now immersed daily in conversations with companies pursuing larger Reg A+ equity raises. These types of businesses (particularly hardware startups) often fall into the same mistakes over and over again.
The Equity Crowdfunding Era is Upon Us
The Jumpstart Our Business Startups (JOBS) Act has opened up a world of new funding possibilities for businesses of all shapes and sizes, from startups and small to midsize businesses (SMBs) up to small to midsize enterprise (SME) businesses. Options range from Title II crowdfunding—restricted to accredited investors—to Title III crowdfunding with non-accredit or "main street" investors for up to $1M seed capital (also known as Reg CF), on up to the high end with Reg A+ offerings of up to $50 million from main street investors throughout the world.
For the first time, equity crowdfunding offers democratic access to capital to all entrepreneurs, whether they are male or female, regardless of their ethnicity, and independent of their location. The result: a new era of fundraising that's more democratized than at any other time in our history.
Equity crowdfunding is now a critically important capital option for many growing technology businesses and startups, serving as an alternative to traditional VC investment or nonprofit crowdfunding platforms like Kickstarter or Indiegogo. The decision to invest simply depends on how compelling the business is, and how well it's explained and marketed.
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5 Equity Crowdfunding Do's and Don'ts
The key for entrepreneurs is to think about your equity crowdfunding pitch and the choices you make during the investment process from a prospective investor's point-of-view. When they look all the materials your business has to offer, and the budgeting and marketing decisions you've made, think about whether they'll say "yes" or "no" to each component in turn.
Are you ready to jump in? If so, be sure to avoid the five most serious mistakes:
1. Comprehensive Videos
Many entrepreneurs want to make their video a complete and thorough pitch. A fact-based 5-7 minute video is the kiss of death for your offering. The viewer has too much time to get bored and exit before the end. This becomes the first "no"—an event great salespeople will tell you to avoid at all costs. The next "no" follows a few seconds later when they exit your offering page. You need a series of "yesses" to win over a prospect. Study YouTube video stats and you will see how quickly viewers drop out.
Instead, create a brief and engaging video that will leave your viewers wanting more. This means two minutes, tops. Are you demonstrating a new piece of wearable hardware, or a new security software capability? Make it funny, entertaining, and fast-paced enough to prevent boredom. It is vitally important that potential investors watch the whole video, as it's the first part of the selling ("yessing") process. Opt for short and compelling over long and complete. Imagine potential investors reaching the end of your video and thinking "What? It's finished already? I want to know more!"
2. Impersonal Content
Okay, you may be concerned about seeming too young to be credible or too old to be cool. Instead, many entrepreneurs simply focus on their product demo as the key selling point of their pitch. That's understandable. But wait, the content of your pitch and offering pages is your best opportunity to establish personal credibility with your audience. When done well, viewers will get their personal read of your trustworthiness, and begin to feel like they know you. To achieve this, you have to be there in person. Viewers need to see enough of you communicating and expressing yourself to conclude you are worthy of both their money and their trust.
A recent Stanford University study, in fact, showed that a 5 percent increase in a CEO's presentation ability (which respondents have judged within a video's first 30 seconds) equates to an 11 percent higher price in an IPO. The same dynamic is at work in equity crowdfunding pitches. You must show both competence and trustworthiness while speaking naturally and projecting confidence and ease during the presentation. A stilted monotone will not do the job. An open, approachable style will work well—the more genuine and open, the better.
3. DIY Marketing
There is a tendency for companies to "do it themselves" and market their own offering. A common result: these companies will implement two or three components of the marketing spectrum in the over-optimistic belief that it'll be enough to carry the day. This may be driven by lack of cash-on-hand, or from a lack of marketing experience. True success in crowd investing requires full 360-degree marketing with engaging content and excellent execution, all orchestrated in a carefully coordinated manner.
Rarely can a company drive all of these necessary components themselves, and execute the overarching strategy effectively. This is a situation where professional help is almost always required. 360-degree marketing includes public relations (PR), leveraging large-scale social media influencers, along with the more obvious advertising, email marketing, and social media promotion.
4. Launching with Too Small a Budget
Many companies start out on a small budget to test out their marketing, either to save cash or due to lack of experience. Generally, this can sink a business before it even gains much momentum. Equity crowdfunding is inherently an open, public forum in which rapid success is apparent to all (and lack of traction is equally visible, too). Early traction generates more success. Early mediocre results close down interest from new arrivals. The first two weeks are critical to the complete success of an offering.
Remember that the cost of resuscitating a campaign that's had poor initial traction is very high and may, in fact, be impossible. You only get one initial launch. Make it count.
5. Working with the First Platform That Says Yes
Take a close look at the funding portal options available. The Financial Industry Regulatory Authority (FINRA) has a regularly updated list of registered Reg CF and RegA+ funding portals. Carefully consider each portal's strengths and weaknesses, and how those map against the nature of your team and your business. If the portal only describse the rosy scenarios that might occur, you should be concerned. Take a close look at the companies they've assisted and those they are working with now. Look at the quality and suitability of those companies. Talk to those companies directly to find out how they like the platforms' service and performance. Due diligence falls squarely on you, the entrepreneur, to choose the right equity crowdfunding platform for your business.
In all, it is worth your time to study the equity crowdfunding arena before throwing your own hat into the ring. Study what others have done well and poorly, and check my update posts on Manhattan Street Capital for monthly Reg A+ updates to help improve your odds of a successful offering, and to avoid falling into the potholes that have felled many a promising company. Whether your business is running hard and needs to raise $50 million, or a startup looking for seed funding of $200K, the landscape for entrepreneurial funding has never been better.