Crowdfunding quickly became a popular means of funding for startups and small businesses, but did you know that there are different types? Rewards-based crowdfunding is the process most people are familiar with, having been popularized by sites like KickStarter and Indiegogo. In rewards-based crowdfunding, entrepreneurs raise funds from the public online, and in return, offer them products, services or other gifts. Rewards-based crowdfunding is an alternative to equity crowdfunding, which you can learn more about below. Because equity crowdfunding was limited only to accredited investors, it’s usefulness online was severely limited, and it didn’t become as popular as rewards-based crowdfunding. However, thanks to the 2012 Jobs Act and the new rules from the Securities and Exchange Commission (SEC), the equity crowdfunding landscape is changing.
What is Equity Crowdfunding?
Equity crowdfunding is a type of investing that lets the public invest money in a private company, in exchange for shares in that company. Until recently, the rules regarding equity crowdfunding were strict, and didn’t allow just anyone to invest. Previously, only people with more than $1 million in net worth, or with an income of at least $200,000 for the last two years, could invest in startups. These requirements were set up to protect the public and prevent people from being scammed, or from investing their entire life savings in a startup that fails. When President Obama signed the Jobs Act in 2012, it called for reforms to these regulations in order to allow businesses to raise money from their peers, friends, customers and more, instead of from just accredited investors. It took longer than expected, but those reforms have finally arrived.
How is Equity Crowdfunding Changing?
In an effort to increase access to capital for startups and small businesses, the new SEC reforms allow for any individual to invest in a company, as opposed to just accredited investors, and it can be done online. There are still some barriers to protect the public from scams, though – an individual can only invest 10 percent of their net worth, and startups can only raise $50 million per year. In addition, there are new complex disclosure requirements that must be reviewed by the SEC, and which cannot be done without a lawyer. For businesses, that could mean paying hefty costs, which some startups may not be able to afford. With more people able to invest in startups, small business funding could change for the better.
What Does This Mean for Small Businesses?
Funding is a high priority for startups and small businesses, because without the necessary funds, these companies can struggle to grow and prosper. According to the Q1 2015 Private Capital Access Index* from Pepperdine University and Dun & Bradstreet Credibility Corp., 36 percent of small businesses surveyed nationwide had to rely on their personal assets to fund their business needs. And, over half of these small businesses felt their growth opportunities were restricted. Crowdfunding became a creative way for small businesses to get access to working capital and fund their growth, and now with the changes to equity crowdfunding, there may be even more opportunities for these companies to succeed. While there are risks attached to the expansion of equity crowdfunding, it could be an overall positive change.
How to Find Investors for Your Business
Now that equity crowdfunding is expanding beyond accredited investors, many more businesses are likely to look at this unique funding source.
And while a huge number of businesses are interested in funding, the key to earning equity crowdfunding will be getting the attention and interest of potential investors. Even though there are already a few platforms that can help you navigate the equity crowdfunding world and find investors, you’ll still need to earn your investments. You’ll need to stand out in the crowd and be able to show potential investors that you’re worth it. Consider these tips for finding and winning investors for your business:
Spread the Word
Just like with rewards-based crowdfunding, you should utilize word of mouth to help you reach your goals and secure investors early on. Reach out to your network of family and friends and let them know you’re looking for investors, or ask them to spread the word. If you’re using a site like Crowdfunder to find investors, send your network the link to your profile and ask them to share it as well.
Tell Your Story
If you’ve ever watched the popular investing TV show “Shark Tank,” you know potential investors will want to know all about your company and will have many questions. When trying to find investors for your business, telling the personal story of your company – how you started, where you struggled, and what you want to accomplish – can help. Include important details, like why you decided to start your business and what the funding from investors will go toward. The more potential investors know, the more comfortable they may be investing in your business.
When looking for investors, you’re essentially trying to sell people on your business, and convince them that what your company does is worth their funding. Telling your story in a compelling way could help you stand out and help you win investors. Consider making a video that tells your company story and include testimonials from customers. Aim to make potential investors see the value in what your business does, because that may help you win their funding.
There are many ways to put yourself out there and tell your story, so get creative. With so many more people allowed to invest in startups, there are tons of new opportunities out there. Take advantage of the changes to equity crowdfunding and get the capital you need to help run and grow your business.
Expert Advice for Launching a Campaign
In our Google+ Hangout “How to Successfully Launch a Crowdfunding Campaign,” crowdfunding experts with KivaZip, NYC Business Solutions, Sparkmarket and more shared tips for preparing and launching a crowdfunding campaign. Their advice applies to both rewards-based and equity crowdfunding and could help you win investors for your business. Check out some of the highlights and watch the full video below!
- For most platforms, campaigns should include a three minute video to introduce the team and the product, service, or ask. Platforms like Kiva Zip don’t allow for a video, so be sure that you can upload one before you spend time and energy putting one together.
- Allow for prep time for your campaign. For most crowdfunding platforms, you’ll need 30-60 days to prep. For equity crowdfunding, you may want to give yourself 60-90 days because you’ll want to research some of the legal pieces and make sure you’re in compliance with them.
- Each type of crowdfunding platform has different target markets. Make sure you research each platform and try to select the best fit for your company and campaign.
- Be realistic. How much do you actually need? How much would you like? How much will the platform take in fees? How much will you need to pay in taxes?
- Build a trusted team to back you. Because crowdfunding is so social, the most successful campaigns tend to be the ones with a strong support team.
How to Get Started as An Investor
In order to protect the public from fraud and debt, the Securities and Exchange Commission (SEC) required startup investors to have a certain income or level of assets. New changes from the SEC have reformed those requirements and now allow anyone to become an investor in selected crowdfunding initiatives. There are still some rules in effect to protect the public, such as an individual not being able to invest more than 10 percent of his or her net worth and startups not being allowed to raise more than $50 million. Now that the playing field has opened up, you’re probably wondering how you can start supporting small businesses by investing your money for a share of the company. Here’s what you should know to begin investing:
Find the Right Platform
Just like there are platforms for rewards-based crowdfunding, like Kickstarter and Indiegogo, there are many platforms that are likely to specialize in investment crowdfunding. Crowdfunder, which was founded in 2011 and is located in Venice, CA, allows businesses to raise funds online through accredited investors. Once the new SEC changes go into affect, anyone will be able to use Crowdfunder to invest in a business. Another popular platform is AngelList, which lets startups find investors as well as employees through its recruiting feature. Some platforms cater to specific industries as well, like Realty Mogul, which is a real estate crowdinvesting platform founded in 2013. There’s a good chance that many of these platforms will open up beyond accredited investors at some point in the near future. When you get started as an investor, make sure you shop around and choose a reliable platform that supports the type of business you want to invest in. To start, check out this post on the top 10 equity crowdfunding platforms for startups.
Find the Right Business
Once you’ve found the right platform, you need to find the right company to invest in. Of course, just like other investments, your financial goals are likely to dictate much of where you would want to invest. Are you looking for long-term or short-term gains? What’s your appetite for risk? How well are your investments diversified? Most importantly, if you’re new to investing, then you should definitely find an expert who can walk you through the process. One of the promises of many of these platforms is that you’ll have the opportunity to invest in local businesses and/or other companies that you want to support. Of course, it should be assumed that any investment in a startup, equity crowdfunded or otherwise, is likely to be risky.
Make a Smart Investment
Making a smart investment means researching the site you’re using, researching the business you’re investing in, and knowing the right amount to invest. When it comes to the company you want to invest in, it may be a good idea to look at its business credit report and see if it is a reliable company, if it has been in business and isn’t just starting. You might also want to consult someone, like your accountant, about your finances so you can invest the right amount of money. You should also research the industry for the business you’re considering to get a better idea of whether or not the company is offering something new or solving an important problem. Having detailed information can help you determine whether or not you could see returns on your investment down the road.
There’s a lot to consider before investing in a startup, but opening equity crowdfunding to the public could be a great opportunity for businesses to get better access to funding. We’ve produced a number of events, videos and educational resources you can access on our Access to Capital crowdfunding page!