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Funding Guides Nov 25, 2019 5 min read

Crowdfunding Advantages and Disadvantages

There’s no doubt equity crowdfunding is a great tool but as always, not all that glitters is gold. Here are some crowdfunding advantages and disadvantages to consider before embarking on the process.

So let’s take a good look at the two sides of the coin:


Advantages of equity crowdfunding 

Turn your customers into advocates

An equity round is a great way to engage with your customers and give them the opportunity to be part of your journey. FinTech giants like Monzo and Revolut could have easily raised all the money they needed from VCs, but they opted for equity crowdfunding rounds as a way to engage with their customers and increase their loyalty and advocacy.

Engaged investors and sector expertise 

As this will be a very public round, it will be a great opportunity to bring sector experts into your company. ‘Everyday investors’ that can open doors to new markets, introduce you to potential key hires and increase your network of current and potential future investors.

You can also use the round to give the opportunity to current investors to increase their stake in your company. In any case, it’s a great opportunity to engage with all sorts of investors and make them even more excited about your venture.

Public validation and credibility

A successful equity crowdfunding round will be a very public way to validate your business plan. All things going well, you’ll end up with hundreds (if not thousands) of investors that will bring credibility to your business proposal. This will be a great ‘reason to believe’ for future rounds, be it VC money or even another round of equity crowdfunding.

Brand awareness and profile raising

An equity crowdfunding campaign is a great excuse to shout about your product and service. Although just the fact you’re crowdfunding is not news anymore, you can take this opportunity to engage with media and tell your company story. Hitting certain milestones, like 100% of your objective or significant overfunding, will naturally attract interest, so make the most of it!

 

Disadvantages of equity crowdfunding

The company needs to be in the right stage

As we’ve mentioned in previous posts, the crowd on the platform will never lead a round – they will always follow your crowd. That’s why, generally speaking, equity crowdfunding is not adequate for pre-seed companies. At that stage, you won’t have a customer base of any meaningful size to engage with. 

Furthermore, without proof of a market-product fit, it’s going to be extremely difficult to convince investors outside your circle that you have an incredible investment opportunity. At this point, you’re better off getting some angel investment, ideally from someone in your network.

Not for all sectors

Although there are examples of B2B companies raising successful rounds, sectors with large customer bases tend to do much better. Equally, research intensive companies with long product cycles (think MedTech, AI, etc.) are a bit more challenging to fund via this modality, but again, there are examples of companies that have managed it!

You have to have at least 30% of the investment pre-aligned (the more, the better!)

Related to the first point, you’ll need to launch your campaign with a bang and this is a numbers game. Both in terms of total investment (as a percentage of your objective) as well as the quantity of investors.

The investors in the platform will not lead the round but will invest along your crowd. They will want to see validation of your idea in the form of large sums of money from a decent amount of people. After all, if your closer circles and customers don’t want to invest in your idea, why should they? Building this initial crowd will take some time, which brings me to the next point.

They take a lot of effort and time

You’ll need time to shoot and edit your video, put together a really compelling pitch, refine messages, prepare for Q&A, and crucially, build and warm up your own crowd. And then there’s the time you’ll be live and the post-campaign. You should expect it to take 6 to 8 months from beginning to having the money in your bank account.

But even more importantly, during that time you’ll need the almost exclusive focus of one of the members of the founding team. They could be otherwise helping with the growth of the company. You’ll need to measure this commitment against the benefits of doing a campaign.

There are many aspects you need to take into account to run a successful campaign that will need the attention of your founders and senior team members.

Costs

Running an equity crowdfunding campaign will have some upfront costs, namely:

  • A decent video: starting at £3k, it could easily go up to £5k or more if you want several locations, animations, effects, etc.
  • Designers and potentially copywriters for your pitch. I would allocate £2 to £4k
  • Consultants: if you want some guidance on the process, you should allocate about £2 to £3k on that front
  • Platform fees: 6-7% of the amount raised plus some closing fees depending on the platform

It’s crucial to take all of these costs into account when setting your funding objective!

They’re all or nothing

If you don’t reach the objective, you won’t receive the investment. This could have a negative impact on your company and personal reputation. That’s why it’s important to be very realistic in terms of setting your objective and only launch when the chances of success are high.

Not all Angel Syndicates or VCs like equity crowdfunding

Although as the sector matures, equity crowdfunding it is more accepted as a legitimate source of funding, some VCs, Angel Syndicates and institutional investors are still sceptical about this modality. 

Having said this, 52% of all rounds over £1m in Crowdcube have also been backed by VCs or institutional investment. For example, in their own meta-round, Crowdcube opened with the announcement of investment from Draper Esprit, Balderton Capital and Channel 4.

My recommendation here would be to talk to your main existing investors and potential other backers to understand their position on equity crowdfunding and see if this would be a barrier for them to invest.

Some of their objections could be:

  • On the perceived worst terms that they will get: make sure you’re giving full rights for the bigger investors and that they are aware of it
  • Inflated company valuations that could cause future ‘down-rounds’: be very realistic on your company valuation and don’t run before you can walk.

If you’re still facing opposition from your main investors, you might want to consider closing a round with SeedLegals first before opening up to the crowd. 

Conclusions

Equity crowdfunding has many advantages. So much so that many companies that might have raised all their capital through VCs have opted to do public rounds to engage with their customer base. However, there are a few disadvantages too and before embarking on this adventure, you need to be really sure that the benefits will outweigh them.

Do consider an equity crowdfunding if:

  • Your company is at the right stage and operates in the right sectors
  • You have an active customer base that you want to further engage by offering them the opportunity to invest
  • You want to build further brand awareness and raise your profile
  • You have the time and resources to run a campaign, including raising a good percentage of the objective upfront
  • Don’t have the opposition from key current or future investors

Hopefully this blog post will help you decide if equity crowdfunding is for you. But if not, you can always use SeedLegals Funding Rounds, SeedFast or Instant Investment as an alternative.

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