As an early-stage business, there are very few things that are more important than capital. The competitive landscape will change, market conditions will fluctuate, customer behavior will vary and your team will transform. Such volatility is to be expected in any early-stage business, but one thing that cannot withstand long-term volatility is the amount of capital you have to run your early-stage business.
For the most part, if you have the capital to make it through continued product development, team changes and market pivots — all backed with a dedication to succeed — you will at least still have the chance to grow and scale.
Now the question arises: How do you acquire capital as a startup?
You primarily only have four major options:
1. Friends and family funding
2. Venture capital or angel funding
3. Getting a loan from a bank
4. Investing your own savings
For the vast majority of early-stage entrepreneurs, these four options may not be achievable because:
1. Raising tens or hundreds of thousands of dollars from friends and family is not feasible.
2. Venture capitalists or angel investors will not invest, given a lack of serious traction.
3. The entrepreneur does not have assets to put down as collateral against a bank loan.
4. Most early-stage entrepreneurs don’t have piles of cash in savings to invest in their own businesses.
So what other options are there? One major option that has been growing rapidly for the past 2-3 years is equity crowdfunding. You may or may not have heard about equity crowdfunding, but I truly believe that this industry is going to completely disintermediate and disrupt the early-stage investing industry for good.
What is it? In short, equity crowdfunding makes it possible for U.S.-based businesses to raise funds from unaccredited investors.
In recent years, equity crowdfunding has been affected by two key developments:
1. Before the Title III reform of the JOBS Act was passed and implemented in 2016-2017, fundraising directly from unaccredited investors was not permitted by the United States financial regulatory authorities.
2. Since the successful implementation of the Title III reform of the JOBS Act, equity crowdfunding has become a massive fundraising industry that has raised hundreds of millions of dollars for startups around the nation.
In general, there are three types of equity crowdfunding campaigns that can be executed by a given company: Reg CF (or Regulation Crowdfunding), Reg A and Reg D. For the purpose of this article, we will be exclusively focusing on Reg CF Equity Crowdfunding.
This avenue of fundraising is a complete game-changer for early-stage businesses that have a community built around them. Reg CF equity crowdfunding campaigns allow businesses to raise a maximum of $1,070,000 from unaccredited investors. This means your friends, family and anyone in your network can invest as little as a few hundred dollars directly into your startup. Now magnify this micro-investment across hundreds, or potentially thousands, of people and you can quickly amass a sizable funding round that can be obtained much more efficiently than other form of traditional fundraising.
A clear example of this process and how successful it can be is demonstrated by Wefunder, a platform that specializes in equity crowdfunding. They have already raised over $130,000,000 across 370+ startups (and counting). Equity Crowdfunding is a radically innovative path for early-stage businesses to raise funding from their users, email list subscribers, social media followers, friends/family and the overall network surrounding the company.
Given that the minimum investment in several popular equity crowdfunding campaigns is as low as $250, the friction to invest is fairly low. There is also a large community of online equity crowdfunding investors who are actively looking for new deals to micro-invest in. By tapping into the power of the crowd, businesses now have a much more feasible and accessible option to raise funds and acquire not only investors but long-term brand advocates. Especially given how volatile the overall investment markets are right now, equity crowdfunding is becoming a more attractive option for startups that are in need of funding.
Look out for my follow-up article digging into the technical details of launching an equity crowdfunding campaign, whether or not equity crowdfunding is right for you, and what you need to do to succeed in equity crowdfunding — as my team and I have raised tens of millions in the crowdfunding space. But for now, it is important to note that equity crowdfunding is growing rapidly and is here for entrepreneurs who, until now, did not have a viable fundraising option.
Go to Source
Author: Krishan Arora, Forbes Councils Member