When the general public think of “crowdfunding”, they first think of Kickstarter. But “rewards crowdfunding” as offered by Kickstarter and others is just one of many types. For entrepreneurs, equity crowdfunding offers another option for financing.
The choice of rewards or equity crowdfunding should begin with an explanation of what each is.
Rewards crowdfunding is a wonderful way to validate a new product thorough pre-orders and getting feedback from customers while in the design phase. Since the entrepreneur does not give up shares, rewards crowdfunding also means the entrepreneur retains full control of their company.
Equity crowdfunding is like a hybrid between venture capital and the rewards crowdfunding people tend to be more familiar with. Equity crowdfunding campaigns look and feel like Kickstarter campaigns – they have video, a public Q&A forum, payments done through an online platform, and so on. But instead of the money going towards a pre-ordered product, equity crowdfunding means the contributors get shares in the company on offer.
Given the choice between raising money WITHOUT giving up equity, and WITH giving up equity, entrepreneurs would all-else-being-equal prefer to keep shares in their company. But this post will give you 7 reasons why you might want give equity crowdfunding a second look.
1. Equity crowdfunding typically raises a lot more money. Yes, rewards crowdfunding campaigns have raised hundreds of thousands of dollars (and euros, pounds and others!). But this level of uptake is very uncommon. You might be the one to beat the odds, but when it comes to raises in the six-figures the success rate with equity crowdfunding is higher – and depending on the country, it’s possible to raise several million.
2. Suitable for more kinds of businesses. Rewards crowdfunding can work great for product development, but what if you are in the business of something that can’t be touched and bought? It’s pretty difficult to shoehorn a software business into a Kickstarter reward. Equity crowdfunding enables B2B businesses, more-established businesses, and businesses needing the money for something other than new product development to effectively raise funds. Whether you choose rewards or equity can be determined by what kind of business you have.
3. Expert feedback. Whether you run rewards or equity, it will be intense - but running an equity crowdfunding campaign will be more rigorous than rewards crowdfunding. You’ll have outsiders look much more critically at your entire business as an investment proposition before you can launch. You’ll need to get your company strategy nailed down. You’ll need to have your shareholder agreement, company constitution and share structure cleaned up. These processes are, in themselves, highly valuable exercises – especially if you are planning to sell in the future.
4. Valuation proof. One thing that owners really struggle with when selling their business is valuation, and justifying it to the buyers. An equity crowdfunding offer is great validation to kick off negotiations – if your campaign is successful, the public has validated an equity value for your company. A rewards crowdfunding campaign shows something different – your ability to execute on marketing and that demand for your product exists. Some companies have used equity crowdfunding even when they don’t actually need the money, just to prove up their valuation, prior to an initial public offer or sales process.
5. Smart money. Some platforms will ask you to anchor your equity crowdfunding offer with a “lead investor” (someone from an angel or venture capital background, who contributes a large sum towards your goal as a way of validating the proposition). Rewards crowdfunding money tends to get people who are highly engaged in providing feedback on your product design, but will be silent on other areas of your business development. Having that “smart money” expertise in there can be a valuable source of contacts and advice, incentivized as they are to see your company succeed.
6. Makes you run faster. Some entrepreneurs would rather not be beholden to outside shareholders. If you’re more into using your business as a vehicle for lifestyle design and aren’t interested in an eventual exit, it’s true that outside shareholders are not going to be for you. But if you’re going for big growth, having financial backers to satisfy will impose a whole lot of pressure and commercial discipline – and that can be a good thing.
7. Marketing benefits. While publicity can be gained in both rewards or equity campaigns, journalists are approached daily with requests to feature the latest rewards campaign of the day. By contrast, equity crowdfunding platforms tend to have just a handful of offers “live” at a time – rather than hundreds or thousands in the rewards space, making it easier to stand out in a “crowded” media landscape.
So what do you think? Rewards or equity? There are quite a lot of really good reasons to bite the bullet and offer up equity in your company. The two can even work well together. Whether equity crowdfunding, rewards crowdfunding, or neither, or both are right for you is something you should think carefully about, and get advice if you think you need it.