EQUITY CROWDFUNDING
By: Kayode Olugbemide
Tags: Financial Services, Fundraising, Business, Business Strategy, Startup

Equity crowdfunding is, like its name suggests, the method of raising money for a business from contributions from people (crowd) while giving them commensurate chunk of the business ownership (equity). There are many types of crowdfunding out there that you can explore. The key word in business success is the word ‘explore’ which is synonymous with ‘venture’. And I’m sure you are familiar with the statement: nothing ventured, nothing gained.

So, just like any exploration there are pros and cons in equity crowdfunding. There is a reason why the person who bears the greatest risk in an organization pockets the lion share of the profit, that is, if it can fit in his pocket. The cons should not scare you already. Trust me, sometimes great opportunities come along with some discouraging factors and I believe these factors are there to sieve out the weak-willed hopefuls from the ones who are in it for the long haul. So, don’t lose sight of the end result as we examine the pros and cons of equity crowdfunding one after another.

The Pros 1. A Fishing Net Is More Effective Than A Hook

Commercial fishermen get better results than the novelty fishing trials, not necessarily because of the wide gap in experience or trade-knowledge (which, of course, is important) but basically as a result of the type of tools in their hands.

Engaging the public at the same time multiplies your chances of reaching your funding goal within the shortest time. Remember, the money is out there. As of November 2020, the maximum amount you can raise under Regulation Crowdfunding has been increased from $1m to $5m. For a Startup, $5m is a good place to start from. Just imagine how much government and private company employees, students, barbers etc. put together can raise for that project because there is no limit to who can buy equity of your business.

2. You Become Thomas Edison, Only A Better Version

‘You mean Thomas A. Edison of the United States of America? No way,’ you might say. Here is the math: Edison had an idea of a light bulb and he had to explore how to make it real and workable. He failed 10, 000 times or as he put it, he ‘found 10, 000 ways that won’t work.’ Business is not so much different in the sense that everything starts with an idea; on the other side it also has blindsides and numerous factors that must be considered to achieve success. With more people than a handful in Edison’s team of researchers having equity in your project (a crowd) more helpful ideas are generated within a shorter time frame.

Get people to help you write your crowdfunding pitch, drive your crowdfunding campaign etc. here.

3. You Use One Stone To Kill Two Birds

It is true, two birds. Okay, not literal birds, though that too is a possibility. This is how it works: you are there on the crowdfunding platform asking for funding. On the flip side, what you are unconscious of is the awareness you are creating, the traction, the momentum that you are building. Your business successfully secures funding while also benefiting from the marketing the exercise is creating.

4. Political Control of the Business

This is one of the considerations of entrepreneurs before going public with their business — losing their voice in their own company. It is like when the government takes away a child from her mother. Just ask Steve Job. Fortunately, using a crowdfunding platform like Vobbies Software helps you eliminate such a threat because you retain the power to determine prices/valuation. More so, the funds come like a general church offering contributed by both young and old in smaller quantities as opposed to a league of powerful financiers who dictates the church’s musical tune.

5. It Helps You To Test The Waters

The market is full of uncertainties. Many ideas with high hopes of doing very well in the market end up becoming big flops because of the market’s unpredictability. That is just the way it is. For this reason, big companies invest heavily in research to increase the level of predictability. Your own organization is a small one, seeking for funding, so the cards are already stacked against you as far as market research is concerned (I am in no way discouraging small businesses from investing in it) compared to the heavyweight firms.

However, if you choose to use a good crowdfunding app for your business, people’s reactions to your business idea can offer you free feedback about how much value your product is going to provide. Do not forget this statement: the degree to which the market will value your products is proportional to the amount of value your products create for the market. Crowdfunding software helps you feel the market’s appetite.

6. It Is More Accommodating Than Banks

The banks’ requirements for loans are usually strict (understandably so because of risks) and standardized for all comers. Yet, the requirements favor pre-existing, profit-making businesses that can produce bank statements, audited financial reports, evidence of similar projects embarked upon in the past etc. while ignoring the newbies. The equity crowdfunding platforms have reduced the bias to a minimum.

There is also the leeway in the repayment plan that equity crowdfunding has over bank loans. The money collected from investors is re-invested in the business over time to grow it whereas banks will be expecting repayment of the capital and interest on the loan as soon as possible. The business is not starting off on a debt.

The Cons

I would like to inform you that any venture that will transfer money from people’s hand into your pocket will require a lot of work and smartness because everyone wants tries to safeguard their money. Even robbery, scamming, pick-pocketing, and common shoplifting require some intelligence, hard work and boldness. So, is it not reasonable that a legitimate business like yours should require more? There will be mountains to climb and rivers to cross.

All I am saying is that the following challenges should not stop you from reaching your goal, but at worst, they should help you to reassess your options of how to reach it:

1. Limit On The Amount That Can Be Raised

As I have stated earlier, the new cap on equity crowdfunding for a startup is $5m. For preexisting companies, some can raise as much as $10m while others can raise a max of $50m, depending on the category under which they fall. This is downside for a startup company that requires large some of money to kick off.

2. Your Business Name Can Suffer A Hit

History is replete with names of businesses that never made it. Some started well but fizzled out like the fire on a matchstick at the instance of the gentlest breeze. That is why you should count the cost before you start at all because it is a ‘swim or sink’ case. There is no in-between. It is like a newbie stand-up comedian or musician who is introduced to a crowd of millions for the first time. Most of the time, it is either he/she performs well and receives applause from the spectators, or he/she is booed off the stage. The alternative to success is failure in this case.

We deal with setbacks differently and recovery for some people may be too high a mountain to climb. Some may never attempt doing anything meaningful again. So, brace up for a possible impact. Read more…