Before launching an equity crowdfunding campaign, you will want to do everything right to increase your chances of success. So much can go wrong when trying to raise money from the general public, so you have to cross all the t’s and dot all the i’s to ensure that your campaign is successful. With proper preparation, a successful equity crowdfunding campaign is more than achievable!
We will look at some of the most pertinent steps in ensuring that your equity crowdfunding campaign is a success. The legal and financial preparations required are a little boring, but they are also essential if you don’t want to end up losing money (or even your company) as a result of a failed campaign.
Prepare your company for an equity crowdfunding campaign
Before you jump right in and start searching for investors, you need to prepare your company and yourself for the campaign. As you will be dealing with many personalities – each of whom deserves your full attention – there are many organisational things to do. Start by thinking about:
A. Your financing plan before the campaign:
You should have figured out how you will handle mass investment and what to do with the money raised from an equity campaign well before you start it. The last thing you want is several pledges followed by a cash flow issue when the process is complete!
B. Your crowdfunding marketing plan:
Don’t underestimate the rigour involved in developing a concrete marketing plan covering every aspect. This includes: deciding which platforms you will use to run the campaign, creating messaging which explains why your project could benefit your target audience while guaranteeing that their investments are secure, and coordinating communication for potential investors inside or outside the relevant platforms!
C. Checking your legal structure and renting the right online platform:
Even if you did not plan to run an equity campaign, you need to remember that investors have a say in company decisions, giving them part ownership as a result of their participation. Often, engineers prefer to run companies as sole proprietorships, but startups who take this route will never be able to raise funds from investors, so a Team-Company structure is usually preferred.
You may choose from several online platform providers that are optimised for managing joint-stock companies online, each one meeting different needs. Before deciding, check if they accept foreign investors or only investors who reside in the country where they are based; if they deduct or add any money or sell consultancy services along with their software; find out the fees they apply (these platforms act as ongoing brokerages which manage investments on behalf of their clients = fees) etc.
Write a pitch deck and platform strategy
A pitch deck is a short presentation to present your business idea to investors and potential partners, so it needs to be well-thought-out and include key information.
Steps to creating a pitch deck
The first step to creating a pitch deck is to write a business plan. A business plan is typically 20-30 pages long and covers your company’s mission, the problem you are solving, your target market, how you will make money and other key information. We recommend having your plan reviewed by an experienced entrepreneur or business owner before moving to step 2.
Once your business plan is complete, it’s time to create the pitch deck.
How to create a pitch deck
1. Get a designer
2. Find the key information
3. Create a slide deck
4. Ask your designer to create the graphics and branding
5. Use a platform like Slideshare to upload your deck
6. Start pitching!
A pitch deck should contain the following sections:
1. Cover page – This should be a short, catchy title to grab your audience’s attention.
2. Executive Summary – This is a 1-2 page summary of your business plan and includes answers to the following questions:
• What is the problem you are solving?
• Who is your target market?
• What is your solution?
• How are you going to make money? (This section should include numbers like revenue growth, number of customers etc.)
3. Product/service description – Here describe what you are offering in detail and how it works. Include images if possible (people tend to pay more attention to visuals).
4. Company overview – This section sums up who you are, what your strengths and weaknesses are, what makes you unique, how big your market is etc.
5. Management team – Describe the key members of your management team and briefly explain their roles in the company as well as their experience and credentials (if any). The team should be represented by a graphic showing a photo of each member, their name as well as their role in the company.
6. Financial projections – Include a few financial projections for different years so investors can understand how much money they could make from investing in you or using your services/products for 1-3 years (depending on when they invest). You can use Excel or Google Docs to create these projections if you don’t know how to do it manually.
7. Use of funds – Detail what you plan to do with the money you raise from investors, for example, how many customers you will be able to reach, how much revenue you will make etc.
8. Investment details – This section should include the amount of money you are trying to raise, the number of shares people will get for their investment and what percentage each share represents of your company (i.e., if someone invests €1000 in your company and owns 1000 shares then each share is worth €1). It should also include the valuation of the company (how much does the company currently cost) and a description of what happens if there is any change in ownership (i.e., if someone buys out all other investors, then they would own 100% of your company).
9. Financial statements – Summarise all of your financial information (assets, liabilities, cash flow etc.) so that potential investors can see that you can afford to pay them back when they invest in your company and start making profits from using your services/products or reselling them at a higher price on their websites etc…
10. Management team biographies – This is a more detailed description of the background and experience of each member as well as any other relevant information about them such as hobbies, interests etc.
11. Terms & conditions – List the terms and conditions of any agreement with an investor. You should also include a disclaimer that states that the information in your business plan is not necessarily accurate. It’s just an estimate.
The platform strategy includes two main parts:
- Choosing which online platform provider you will use for your fundraising efforts and
- Which equity crowdfunding regulations you are going to follow.
Most online platforms that offer the possibility for companies in Europe to raise funds from the general public allow their clients (companies/founders) to choose from different kinds of equity crowdfunding regulations, each with pros and cons.
Let’s now look at some of the most important aspects of each regulation and understand how they differ from each other. Please note that these regulations are for the US, but are pretty much the same with other crowdfunding regulatory bodies.
Regulation D 506(c) – General solicitation and advertising allowed:
This is probably the most flexible regulation and allows companies to openly market their fundraising campaign to reach as many potential investors as possible. This regulation is often used by companies that are already well-known due to past successes or a high profile media presence, allowing them to attract more investors simply by using their reputation in their marketing campaigns. However, in this case, Regulation D 506(c) becomes less attractive for two reasons:
1. Companies that are already well-known can get tremendous visibility without using a 3rd party platform at all and
2. Because using this kind of crowdfunding regulation means that all potential investors will be accredited ones and therefore able to invest more than €100,000 in the company.
So, if you have a small venture with a small budget and little to no media presence, this regulation is probably not for you.
Regulation D 506(b) – General solicitation allowed only for accredited investors:
This regulation is similar to Regulation D 506(c), except that it does not allow companies to advertise the fundraising campaign, therefore limiting the number of potential investors.
The main difference between these two regulations is that Regulation D 506(b) requires that all investors be accredited to invest in your company and therefore limits your fundraising capacity quite significantly as only a very limited number of people can invest in your venture.
Regulation CF – General solicitation and advertising allowed:
This regulation is very similar to Regulation D 506(c), except it requires companies to test the market with their idea first by letting non-accredited investors participate in their crowdfunding campaign. In other words, if you use this kind of regulation, you can let anyone invest in your project, but before doing so you must first test if enough potential investors are willing to do so by using a 3rd party platform such as Seedrs or Crowdcube.
This allows companies to get valuable information about how much people are willing to invest without triggering legal concerns about selling unlisted securities without registration (which would be illegal).
However, note that even though this kind of regulation allows general solicitation and advertising, it still limits the number of potential investors as the number of people willing to participate in your project may be finite.
What are the key differences between Regulation D 506(c) and Regulation Crowdfunding?
The main difference between Regulation D 506(c) and Regulation Crowdfunding is that when using Regulation Crowdfunding you must follow specific rules regarding how much money you are allowed to raise (€1,070,000), who can invest (€2,700 or 10% of an individual’s annual income) and how you are allowed to market your campaign (€100,000+ in annual revenue).
When using Regulation D 506(c), you do not have to follow specific rules regarding how much money you are allowed to raise (€1,070,000), who can invest (€2,700 or 10% of an individual’s annual income) or how you are allowed to market your campaign. However, when using Regulation D 506(c), you must follow the Securities Act of 1933, which requires that you register your offering with the SEC. This means that if you use this kind of regulation for crowdfunding (which is called a private placement offering), then the SEC has a legal right to review and approve your offering before it can be sold (in other words: It will not be considered an “offering” until the SEC approves it).
3. Develop a PR and Ad budget
To make sure your campaign is successful, it is recommended that you develop a PR and Ad budget. This means you will need to hire a PR firm to spread the word about your company. The more people who are familiar with your company, the better your chances of attracting investors. In addition, it is also recommended that you spend some money on Google ads to promote your company and campaign.
Make sure all of the required financial documents are completed and filed correctly with the SEC
The most important thing to keep in mind here is that if you have any kind of funding (including revenue) in the last two years, there should be no problem with this requirement.
If not, it might be difficult for you to get funding through equity crowdfunding platforms because they are required by law to verify these documents before listing them on their sites (which means they will want to see tax returns and audited financial statements).
4. Ensure you have a solid financial model
You’re going to need to be able to show potential investors a strong financial model for your business with enough detail for them to be convinced that it is a solid investment.
A financial model is the foundation of any successful business. It allows you to:
- Project your expected costs,
- Set appropriate pricing, and
- Predict profitability.
In addition, a good financial model will show you where you have room to improve efficiency, increase profits, and reduce waste. A well-constructed financial model will also help you make better decisions and avoid costly mistakes.
After conducting thorough market research, the next step is building a financial model. This is an essential step that should not be overlooked. The main goal of a financial model is to project your expected sales and expenses over the next one to three years. It’s a detailed spreadsheet that includes all of your projected costs and expenses, including:
- Inventory costs
- Credit fees, etc.
It also includes all of your projected sales and income streams.
You can build your financial model using Excel or another spreadsheet program. You can also hire a professional financial analyst to create one for you.
5. Have a great product demo and video
Make sure that you have a great product demo video that is compelling, and engaging with a clear message. Use a professional voice over artist who can read the script properly.
The whole point of the crowdfunding demo video is to show potential investors your product, how it works and why it will be successful in the marketplace. It needs to be very engaging, explain how they can use the product and show people who are using it.
It’s important to remember that crowdfunding sites like Kickstarter are not just about raising money, but they’re also about gaining awareness of your product or service. So, if you’re not getting enough funding, then don’t be surprised if this might be because people aren’t aware of what you need funding for in the first place!
6. Add a high-quality product image
Adding a high-quality product image to your campaign page is very important. This helps to create trust with potential investors and also allows them to see what they are going to be getting when they back your project.
When you’re adding product images, add high-quality images that look professional. Make sure you use a professional photographer and when taking the images check that you have good lighting.
It’s also important to remember not to over-promote your product in the image. It needs to be simple and easy for people to understand what it is and how it will look if they back your project. Your goal here is not just to get funding but also to get people talking about your product all over social media!
7. Build a strong social media presence beforehand
Social media is extremely important to create awareness of your crowdfunding campaign before it goes live. Build up a powerful social media presence with followers and fans before starting any kind of marketing campaign.
This will increase awareness of your crowdfunding campaign on sites like Kickstarter and help you gain more followers to spread the word about your business or project even further.
If you’re looking to launch a crowdfunding campaign, the tips in this article should get you well on your way to success.
Make sure you have a great product that people want, your marketing strategy is solid and you are prepared for the long haul!
If all of those things are in place then you really shouldn’t have trouble getting funded!