Starting a business is hard. It’s an uphill battle, and along with the inevitable investment of blood, sweat and tears, entrepreneurs, by necessity, often invest another precious resource: their own money.
Not only does this cause a heavy financial burden on new business owners, it usually isn’t enough to sustain the fledgeling business. Ambitious entrepreneurs might seek funding from venture capital firms or angel investors. These traditional routes are great for business owners who can demonstrate the potential for rapid growth and high returns on investment. But direct access to these types of investors is limited, and not every business idea, no matter its potential, gets the green light. Fortunately, there are other ways to get that much-needed injection of capital.
Mayank Agarwal, CEO of Zenspace
The Roar of the Crowd
One way of raising money that has been gaining popularity over the last few years is crowdfunding. Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet. The most popular type of crowdfunding by far is reward based. With this method, a company’s backers are promised a reward for their investment, typically a pre-order discount, early access, or special promotional items. You might have heard of a little site called Kickstarter--it’s one of the most popular platforms for reward-based crowdfunding. Kickstarter and its ilk are great for companies launching a new product or project, but ambitious startups are most likely looking for a larger, more long-term investment from their backers. Enter Equity crowdfunding. Like reward-based crowdfunding, this method of raising money relies on large numbers of people providing funding. The key difference here is that instead of typical rewards, backers gain shares, or equity, in the company. Internet-based equity crowdfunding sites, like SeedInvest, make it easy to match potential investors with projects that interest them. SeedInvest and similar sites aren’t restricted to venture capitalists and angel investors; they enable almost anyone with the means and desire to invest in a business to get in the game. In the US, equity crowdfunding was made possible by the Jobs (Jumpstart Our Business Startups) Act, signed into law by former President Obama in 2012. The act made it legal for companies to use crowdfunding to issue securities, something that was not previously permitted. A more recent change to the Jobs act, Title III, has made it possible for almost anyone to invest in a startup. Before Title III, only “accredited investors” (individuals with a net worth of at least one million dollars, or with an annual income of $200,000 or more) could participate--an elite group indeed!
Getting Started: For Startups
Getting an equity crowdfunding campaign up and running is in many ways similar to starting a standard rewards-based campaign. First, you need to build your social network. After all, your campaign won’t get far without putting the “crowd” in crowdfunding. Get the word out through blogs, social media sites, news outlets. Get attention any way you can. Secondly, get your ducks in a row. Equity crowdfunding is highly regulated, so do research to make sure you understand the legal ins and outs. Get your offering documents together: your business plan, a description of what you’re offering, the risks and rewards. You might want to get a CPA to review everything to make sure your documents pass muster. Next, find a crowdfunding platform that suits your project and apply to get listed. Equity crowdfunding sites can be picky, so make sure you present your project in the best possible light. Once listed, you’ll want to dive into marketing head first. Find investors and direct them to your funding platform. With a great looking project, persistence, and a touch of luck, you’ll get the funding you need to grow your business. It doesn’t stop there, of course. You’ll have to provide constant updates to your investors, make sure you’re properly insured, and work to put those funds to the best use possible. But by this point, you’re well on your way to success.