7 Equity Crowdfunding Myths, Debunked
I recently stumbled into a post from Chelsea Rustrum on Hackernoon entitled, 7 Equity Crowdfunding Myths, Debunked. It was short and sweet but did an outstanding job of summarizing many of the points we’ve been making to both small business owners in search of capital and potential investors that want to support local businesses in North Carolina. For the sake of this post, I’m going to repost the seven myths with a little original commentary but be sure to take a look at Chelsea’s original post for additional context.
1) MYTH: “Only for early stage companies” Companies of all stages – from start-up to profitable and wanting to grow – raise capital. From the small business owner’s perspective, equity crowdfunding is nothing more than a new way to access capital under your own terms. It’s an alternative to the traditional bank, grant, and VC/angel funding options we typically think of as the norm.
2) MYTH: “The regulations are too complex and limiting” These are government regulations so they’re certainly not simple but whether you go it alone or use a crowdfunding preparation service to help you navigate the requirements, it’s doable. The key is having a good handle on your business plan and financials. From there, the other regulations are pretty clear.
3) MYTH: “Venture capitalists look down on equity crowdfunding” While this does buck the common VC/angel approach to investing in companies, astute “money people” will understand that the validation of an offering by a crowd made up of customers, fans, and advocates is an extremely strong indicator of marketability. Many of these high-dollar investors are already seeing how a successful crowdfunding raise can help validate future consideration.
4) MYTH: “The cap table will be ruined for your next round” The concept of an equity offering – particularly a SAFE - negates this argument by allowing investors to receive a financial stake in a company without immediately holding stock. An investor’s return is based on their initial investment amount, the company’s exit valuation or “trigger” events, and the specific terms. Here is an online calculator that allows you to play around with different terms and outcomes.
5) MYTH: “Raising equity crowdfunding is too expensive” Money is not free and neither is any form of capital raise. There are costs associated with equity crowdfunding including filing costs, the costs of communicating your offering to a relevant crowd, and the inevitable cost of the return to investors upon a successful raise and milestone completion. However, compared to giving up 20-30% of your company to aggressive VCs or angles or paying significant interest on a traditional bank loan, equity crowdfunding stacks up in a very positive way.
6) MYTH: “I can’t fundraise from VCs or angels during an equity crowdfunding campaign” Technically, this is simply not true. You can execute simultaneous raises because they are different types of securities offerings but it might not make sense. Referring back to Myth 3, if you’re already in discussions with a VC or angle and it doesn’t look like you will come to terms, considering a crowdfunding raise to prove worth and potentially improve your negotiating position might make sense.
7) MYTH: “Running a campaign takes too much time and effort away from my business” It does take time to clarify your business plan and financials for the disclosure documentation, and there are other time considerations but done correctly, creating a story that involves your company raising capital for growth, potentially sharing ownership with your customers and prospects, and building “owner-advocates” along the way can be time very well spent. A smart raise incorporates the crowdfunding effort into day-to-day business operations (of course, without running afoul of the advertising regulations).