Investment crowdfunding, also called equity crowdfunding, Title III, or Regulation Crowdfunding, is the raising of capital online in exchange for a return on investment, is growing quickly in popularity. In the six months since it became legal, nearly $13 million has been raised. If you’re thinking about conducting an investment crowdfunding campaign, here are five things you need to know before taking the leap.
This sounds dumb, but a lot of folks call thinking that crowdfunding is easy as pie, and that people—strangers—basically throw money at you via the internet. I’m here to offer a reality check—raising money is not easy, whether you plan to raise it via crowdfunding, angel investors, venture capitalists, or even an IPO. Money simply does not rain from the sky—if it did, I’d be on a tropical island sipping on a drink with an umbrella in it, not writing this article. And, anyone who tells you otherwise is a liar or has some sort of ulterior motive.
Raising funds via a crowdfunding campaign—investment or not—takes a significant amount of time, energy, and resources. Those who aren’t willing to invest at least a few months of intense hustling should not consider a crowdfunding campaign (and shouldn’t consider entrepreneurship, for that matter).
Investment crowdfunding campaigns, conducted under Regulation Crowdfunding, require the company raising money (we call them “issuers”) to conduct the campaign through a registered funding portal. Most of the quality funding portals conduct a good amount of due diligence and take less than 1% of all applicants. Of course, you could always list on one of the funding portals that simply list and don’t require much due diligence, but I find that most companies clamor to get accepted by the most popular sites.
This is not as easy as throwing up a Kickstarter or GoFundMe page. You should expect to spend at least $5000 just on CPAs and attorneys, and should have a sizeable marketing budget. You should have a video, logo, and other marketing assets in place, and should anticipate about a month to get the campaign launched (give or take, depending on how responsive you are in getting everything done).
Like I said in point #1, doing a crowdfunding campaign requires the dedication of resources, including money. Even (successful) kickstarter
Did I mention that you need to market, market, market? Aside from digital marketing, you should also be utilizing your personal and professional networks to spread the news, any emails lists or listservers
I’m serious about this one. Investors, accredited or not, are not nearly as stupid as you’d hope. In the past few months, we’ve seen some issuers come out with pie-in-the-sky valuations or try to raise funds with securities instruments that make little or no sense. Just because there might not be a lead investor negotiating terms on behalf of all investors doesn’t mean you should try and pull a fast one on the crowd. Trust me—we industry experts see you, and we talk. Those trying to rip off investors (or those vendors enabling the ripping off of investors) will not last long.
This sounds very “duh” but you wouldn’t believe the number of calls I get from folks who simply cannot run a business or have no business raising capital. From the 10-year entrepreneur who was still giving product away for free to the guy who blew through $2 million without ever launching to the CEO who needed to raise money to “hire” a person to do business development so that that person could make a call to a company that he wanted to form a partnership with. Please be a serious business. You should generally already have an operating company and should already be making revenue (or have a very well-defined path to making revenue). In other words, this shouldn’t be a side idea that you’re only working on a few hours a week—this company should be your full time job, your livelihood, your life.