For many entrepreneurs and small business owners, finding the money to launch their business is not their biggest problem. According to The Chamber of Commerce, 78 percent of small business owners use their own funds to launch their businesses. However, lots of small businesses will eventually need funding at some point with the average debt being $417,000.
When the need for cash arises, there are several places entrepreneurs can go including banks, family and friends, or even venture capitalists. There is also another option that many are turning to, crowdfunding. The crowdfunding model for raising capital can take various forms, but its essential concept involves raising funds for a venture by collecting money from many individuals. Pooling small amounts of money from multiple organizations and people to finance a project or cause, would be a crowdfunding campaign.
There are also several different types of crowdfunding available to those wanting to raise capital. In this article, we’ll take a look at equity crowdfunding, how it works, and some advantages and disadvantages of this model.
What is the Equity Crowdfunding Model?
Equity crowdfunding is a type of crowdfunding model that allows the general public an opportunity to fund a business or project in exchange for small ownership of the business or project.
Crowdfunding has evolved into a revolutionary approach to raising capital. This way of funding democratizes the investment process. It does this by enabling a broad spectrum of investors to fund startups and small businesses in exchange for equity. Unlike traditional fundraising methods, equity crowdfunding platforms allow entrepreneurs to pitch their businesses directly to the public.
These entrepreneurs are really looking for financial contributions from a wide audience in return for a stake in their company. Traditional funding usually relies on a limited number of high-net-worth individuals or institutional investors
This model leverages the power of the internet to aggregate small investments from a large number of people. Now, it’s possible for startups to access the capital they need to grow while offering investors the opportunity to participate in potentially lucrative early-stage ventures.
The advent of equity crowdfunding has been facilitated by regulatory changes in various jurisdictions. This has been done to protect investors while making it easier for small businesses to raise funds. These regulations set the framework within which companies can publicly solicit investments. They also often cap the amount an individual can invest based on their income or net worth. Also, they limit the total amount a company can raise via crowdfunding.
Equity Crowdfunding Platforms
The equity crowdfunding landscape is diverse. There are a variety of platforms that cater to different sectors, investment thresholds, and types of investors. Let’s take a look at some notable examples.
Indiegogo
Indiegogo has evolved from its roots in rewards-based crowdfunding to incorporate equity crowdfunding, offering a more inclusive investment landscape. This dual approach enables entrepreneurs to not only pre-sell products but also to raise equity capital from a broad audience. This includes both accredited and non-accredited investors. Indiegogo’s flexible funding options and global platform encourage innovation across various sectors.
SeedInvest
SeedInvest stands out in the equity crowdfunding sphere with its highly selective process, accepting less than 1% of companies that apply. This focus on quality assurance means investors gain access to a curated selection of startups with significant growth potential. The platform emphasizes transparency and due diligence, providing detailed information about each investment opportunity.
SeedInvest caters to accredited investors but has also made strides in opening opportunities to a broader audience through Regulation A+ offerings. Its commitment to democratizing investment in startups is matched by its dedication to supporting founders through the complex funding landscape.
StartEngine
StartEngine is a powerhouse in the equity crowdfunding domain. It offers investors a broad spectrum of opportunities across industries such as technology, consumer goods, and healthcare. It facilitates direct investment in early-stage companies.
StartEngine supports entrepreneurs from inception to growth. This platform supports startups by providing a method for them to raise capital under the JOBS Act. Its comprehensive educational resources and user-friendly interface enhance the investing experience.
Republic
Republic allows virtually anyone to invest in startups, real estate, video games, and cryptocurrency ventures. Its platform actively promotes investments in companies led by underrepresented founders.
Republic’s rigorous vetting process ensures that only promising ventures are listed. This provides a safer environment for investors. The platform’s focus on community building and education helps investors make informed decisions.
WeFunder
WeFunder serves as a bridge between startups seeking funding and individuals eager to invest in the next big idea. It supports a vast range of ventures, from innovative tech startups to local businesses, making it one of the most inclusive platforms for equity crowdfunding.
With investment minimums as low as $100, WeFunder opens the door to investment opportunities that were once reserved for the wealthy, embodying the spirit of democratic finance. The platform not only facilitates funding but also fosters a sense of community among investors and entrepreneurs, encouraging a collaborative approach to business growth and innovation.
Dealmaker
Dealmaker (formerly known as DealMaker) is a technology-driven platform that streamlines the capital-raising process for companies of various sizes. It is not a traditional equity crowdfunding platform per se but provides a suite of software solutions that facilitate online capital raises.
Dealmaker’s technology is used by businesses and other crowdfunding platforms to manage their offerings more efficiently. This is done to make sure that users are in compliance with regulatory requirements and provide a smooth experience for both issuers and investors.
This platform is particularly well-regarded for its ability to handle complex deals and its flexibility in serving a global clientele. Dealmaker is a great tool for companies looking to access a broader pool of investors.
MicroVentures
MicroVentures is a pioneering equity crowdfunding platform that connects investors with startups and small businesses seeking funding. Unlike traditional venture capital, MicroVentures opens the door for accredited investors—and, in some cases, non-accredited investors—to participate in venture capital and private equity investing with a lower entry point.
MicroVentures is known for its due diligence process. This process involves thoroughly vetting companies before they are listed on the platform. As a result, investors are provided with access to high-potential investment opportunities.
AngelList
AngelList is a pivotal platform for startups, angel investors, and job-seekers aiming to immerse themselves in the startup ecosystem. It revolutionizes the way startups raise capital and recruit talent by providing a streamlined connection between entrepreneurs and potential investors.
For startups, AngelList serves as a launchpad to showcase their vision and secure funding from angel investors and venture capitalists. Investors, on the other hand, gain access to a curated list of startups, allowing them to diversify their portfolios by investing in high-potential companies at early stages.
What about Kickstarter?
You may be wondering where Kickstarter is on this list. Kickstarter itself doesn’t offer equity investments. However, it is worth an honorable mention. Many of the platform’s success stories often transition to equity crowdfunding platforms or attract direct investment.
This can make it a pivotal role in the early stages of startup development. The platform’s global reach and community engagement make it an invaluable resource for testing product viability and building a loyal customer base.
Read: Is the Equity Crowdfunding Model a Better Alternative to VC Funding?
Advantages of the Equity Crowdfunding Model
Expanded Access to Capital
One of the most obvious advantages of equity crowdfunding is the broadened access to capital it provides startups and small businesses. Around 25% of new businesses don’t receive all of the funding required to launch. Not only that, 38% of startups fail due to running out of cash. This means that finding adequate funding to grow this business is crucial.
Traditionally, securing investment required connections to venture capitalists or angel investors, often leaving promising companies without the necessary networks at a significant disadvantage.
Equity crowdfunding dismantles these barriers. Now, entrepreneurs can showcase their ventures to a global audience of potential investors through online platforms. This inclusivity levels the playing field. Also, it increases the likelihood of finding investors who believe in the business’s vision and potential.
Marketing and Publicity Boost
Launching an equity crowdfunding campaign can serve as a powerful marketing tool, generating visibility and buzz for a startup. This indirect benefit is invaluable for new businesses seeking to establish their brand and market presence.
By engaging a wide audience of potential investors, companies can simultaneously promote their products or services, attract early adopters, and gather feedback. This public exposure often translates into a surge in customer interest. The spike in interest can significantly enhance a company’s profile. Hopefully, for the startup, this will attract more opportunities for growth and partnership beyond the immediate financial gains.
Access to a Diverse Investor Base
Equity crowdfunding opens the doors to a wide array of investors. With each investor comes unique perspectives, skill sets, and networks. This diversity can be a significant asset for startups, as it allows them to tap into a rich resource of insights and experiences.
The collective wisdom of a broad investor base can provide invaluable guidance and feedback. This helps businesses refine their strategies, products, and services. Moreover, the global reach of crowdfunding platforms enables companies to connect with international investors. Ultimately, this will help potentially pave the way for expansion into new markets and access to global networks.
Disadvantages of the Equity Crowdfunding Model
While equity crowdfunding has opened new avenues for startups and investors, it also comes with its set of challenges and drawbacks. Let’s take a look at some of those downsides.
Complexity and Regulatory Compliance
Equity crowdfunding introduces a significant layer of complexity, particularly in terms of regulatory compliance. Unlike traditional funding methods, equity crowdfunding must adhere to specific regulations designed to protect investors. These rules can vary significantly across jurisdictions. As a result, the process can sometimes be daunting for startups aiming to launch a crowdfunding campaign.
On top of that, the necessity to comply with these regulations can lead to additional costs and delays. This is because companies need to prepare extensive documentation. They also need to undergo legal reviews and sometimes limit their fundraising efforts to comply with caps on investment amounts or investor qualifications. This regulatory landscape can be a significant barrier. Small startups without the resources to navigate these complexities effectively may have a hard time with this.
Dilution of Equity
A fundamental disadvantage of equity crowdfunding is the potential dilution of equity for original founders and early investors. As startups raise capital by offering equity to a large number of crowdfunding investors, the ownership percentage of existing stakeholders is diluted.
This dilution can affect not only the financial returns for original investors but also the control and decision-making power within the company. For entrepreneurs, losing a significant share of their company’s equity early on can be a tough trade-off. Doing so can impact their motivation and the long-term strategic direction of the business.
This is much different than how it works with reward-based crowdfunding or even debt-based crowdfunding. With reward-based crowdfunding, backers get perks and rewards for investing. With debt-based crowdfunding, backers have the potential to get their money back with interest.
Risk of Failure and Negative Publicity
Equity crowdfunding campaigns are public ventures. As a result, the risk of failure carries the added consequence of negative publicity. For startups that fail to meet their funding goals or encounter operational difficulties post-funding, the public nature of the campaign can lead to reputational damage. This visibility can deter future investment and partnership opportunities. In the long run, this can affect the company’s ability to secure funding through other channels.
Moreover, for investors, the high visibility of failed projects can be a deterrent, as the potential for loss is not only financial but also social, given the public acknowledgment of their investment choices.
Also read:
Understanding the Reward-Based Crowdfunding Model
4 Main Types of Crowdfunding Business Models
Understanding the Debt-Based Crowdfunding Model
