Equity Crowdfunding vs. Traditional Funding

Funding should never be your main focus but it is difficult to ignore something so closely related to your survival. As funding from traditional funding routes like venture capital and bank loans dries up, a new route has emerged–equity crowdfunding. The equity crowdfunding market is expected to continue its upward trend, with substantial growth anticipated from 2024 to 2031 due to supportive regulatory environments and the rise of fintech solutions across regions like North America, Europe, and Asia-Pacific.

In this article, we will go over some traditional funding options, how equity crowdfunding can be a better alternative, and how to launch a successful equity crowdfunding campaign. Read on to know more!

Traditional funding options

To understand the benefits of equity crowdfunding, let us build some context by reviewing some of the traditional funding options for startups.

Bootstrapping

Bootstrapping involves starting and building a business enterprise without external funding. This term originates from the phrase, ‘Pulling oneself up by one’s bootstraps,’ which means relying on oneself to succeed. An advantage of bootstrapping is that your equity stake does not get diluted, nor do your liabilities increase. However, you can take this route only if you have considerable savings.

Venture capitalists

Venture capitalists invest in startups with high growth potential in exchange for equity. They can be individuals, groups of investors, or venture capital funds that pool funds from institutions and high-net-worth individuals. An advantage of traditional VC funding options is their network and business expertise. Startups can rely on their VC investors to introduce potential business partners, key employees, and additional investors. In reality, connections with a VC firm can lead to a successful fundraising round.

Startup loans

You can seek debt funding in the form of small business administration (SBA) loans, term loans, working capital loans, and credit lines. This form of funding is suitable for startups that have a steady cash flow to pay back the debt. If your credit score is good enough, you could get a short-term loan at a 0% interest rate from institutions like Finance Factory.

Incubators and accelerators

Incubators support early-stage startups by providing funding, networking opportunities, mentorship, technical support, marketing assistance, and various other forms of support. Accelerators provide similar support for slightly mature startups looking to scale up operations. Such programs are incredibly valuable for the connections you could build with fellow founders and investors.

Government schemes

In the US, the government supports startups through various grants, loans, competitions, and incentives. For instance, NASA supports startups focused on areas like climate tech and lunar payloads through the NASA Entrepreneurs Challenge where the winning entrepreneur can win up to $1 million in total prizes.

Why Equity Crowdfunding outshines Traditional Funding methods?

Crowdfunding is becoming increasingly popular despite investors becoming apprehensive about equity investments. Back in 2016, the startup crowdfunding deal count was less than 250, and by 2023, this number rose to a little less than 1,500.

An advantage of equity crowdfunding over traditional forms of VC funding is that although the number of shares increases, there is a low risk of founders losing control over their startup since the shares will be distributed among a large number of investors.

Equity crowdfunding is a great opportunity for retail investors to gain entry into private equity and earn high returns. Some also see this as an opportunity to support startups working towards positive social change.

According to CCLEAR, after startups got crowdfunded, their average growth in revenue in the next year was 284.5%. Also, even though 50% of all new businesses fail within 5 years, with crowdfunded startups, this figure drops to 17.8%.

Famous equity crowdfunding campaigns

Some of the most well-known equity crowdfunding campaigns are as follows:

• BrewDog – Over 5 rounds, BrewDog raised $72 million through their crowdfunding initiative called Equity for Punks. In 2017, it became the world’s first crowdfunded unicorn when it raised $264 million from TSG Consumer Partners.
• Paradox Interactive – Paradox Interactive is the Swedish video game publisher behind video games like Crusader Kings, Hearts of Iron, and Europa Universalis IV. In 2016, they raised more than $11.8 million through Pepins, a Swedish equity crowdfunding platform.
• JustPark – In 2015, JustPark raised close to $6 million through crowdfunding. Although the company was already creating value for thousands of users, it was not profitable. Through an effective combination of social media marketing and press, they were able to pull off a successful campaign.

Steps to Successfully Launch Your Equity Crowdfunding Campaign

Now that you know the significance and benefits of equity crowdfunding, let us go over the steps in launching a successful equity crowdfunding campaign.

1. Understanding your funding needs

The first step whenever you raise funds must be to identify the amount of capital you require until the next funding round. You should assess your current status in the market and your product development stage to identify how much capital infusion is needed.

You will need to identify which business initiatives must be prioritized and which ones can be put off to a later stage.

2. Market research

You must browse through crowdfunding platforms and learn key details about recent campaigns by similar companies. You must find acceptable share price ranges, valuation ranges for similar companies, and the average ticket size in such campaigns.

You must also check how other companies are marketing their equity crowdfunding campaigns. At this stage, you must also identify the best-suited crowdfunding platform for you.

3. Business valuation

Based on your financial history, the size of the opportunity your startup is trying to capture, and recent fundraising valuations of similar startups, you must estimate your startup’s valuation.

Since investors will want to know the reasons behind the valuation you are asking, you must prepare a solid and detailed valuation report. You could hire a respected, independent valuation expert like Eqvista for a business valuation report. This will lend credibility to your valuation.

4. Creating a pitch

You must create a pitch that will resonate with investors in the prevailing market sentiment. Transparently talking about your business proposition, the potential value it can bring to investors, and the potential social impact is the best way to present your crowdfunding idea.

You must prepare for any questions investors may have and draft appropriate responses beforehand if this information cannot be included in the pitch.

5. Craft a marketing strategy for the campaign

With crowdfunding, you must generate significant initial momentum to be successful. Crowdfunding platforms generate revenue by charging a fee on the amount raised. So, it is in their best interest to promote campaigns that are doing well instead of showing campaigns that have yet to impress anyone.

To overcome this issue, you must start promoting your equity crowdfunding campaign weeks before it is launched. By the time your campaign launches, a significant amount of potential investors must understand your pitch and the investment opportunity you are offering. You can also ask potential investors to subscribe to an email notification for the equity crowdfunding campaign.

This will ensure that, as soon as your campaign launches, investors will start pouring in funds.

6. Legal considerations

You must launch your equity crowdfunding campaign through licensed intermediaries. Regulatory authorities like the Securities and Exchange Commission (SEC) may have some disclosure requirements you need to fulfill.

Also, there are limits on how much a non-accredited investor can invest in startups through crowdfunding. So, you must verify that all non-accredited investors subscribing to your shares are within their annual investment limits which will be based on their individual net worth and income.

Supercharge your crowdfunding campaign with Eqvista!

If you lack the funds to start your business, you must rely on external sources like venture capitalists and financial institutions. Some downsides to traditional funding options are increased management pressure, increased debt pressure, and dilution of ownership. At present, most traditional startup investors are looking for exits rather than investment opportunities.

A popular way to sidestep such troubles is equity crowdfunding. Startups that were successful at equity crowdfunding have shown considerable growth and tenacity. The key to a successful campaign is preparing a solid pitch and making sure it reaches as many people as possible, as quickly as possible.

If you would like to follow their footsteps into equity crowdfunding, you must invest in a business valuation by Eqvista, a highly trusted valuation expert. Contact our team to know more!