Mary Crouch, author of A+ More Than Just a Grade takes another look at Equity Crowdfunding and looks deeper at three of the biggest myths about it.
Every new business needs essential funding in order to succeed. Crowdfunding, or raising equity through many small value investors rather than large core shareholders, has risen in popularity for start-up organizations. This method is often easily accessible through online platforms such as Onevest and Fundable. Pitch your business and allow any investor to offer money for your exciting new venture? Seems like a valuable resource, right?
However, crowdfunding is not without its criticisms. Some may wonder whether too many investors look bad for their company. Others may ask if online resources decrease legitimacy. Others still wonder if crowdfunding is necessary; what if I already have a broad in-person network? The following three objections will be addressed and, hopefully, refuted.
1. I already have connections. Why should I seek elsewhere?
This is a great question. And, congratulations! If you and your business already possess a solid network, this is actually the perfect time to take advantage of a crowdfunding campaign. A solid base of potential, and actual, investors is essential for successful equity raise. When you have an established following for your start-up, you then have an audience who will be interested in this new way to become involved. Not only this, your current investors can share your project with their own connections in a simple and available way. In a short amount of time, you can capitalize on your current network, and expand to an even broader investor pool.
2. Won’t too many investors look bad? I don’t want to have less control of my company than my shareholders.
These are both valid concerns. However, the main thing to be reminded of is that as the business owner, you have full control of your organization.
Firstly, having too many investors is not actually as bad as it sounds. Companies with many shareholders are still viable for large investors later on. However, if keeping your cap table clean is a priority, Special Purpose Vehicles – SPV’s – are a great way to consolidate multiple individual investors into an efficient unit (more: here).
Secondly, when conducting a crowdfunding campaign, the entrepreneur is able to designate what percentage of the company is open for investment. Let us say a company has 100 new investors, but only 15% of shares available. These 100 investors will be spread across the 15%. Unless a company offers 51% of its company through crowdfunding, the business owner still holds control over the organization.
3. Won’t raising equity online decrease my legitimacy?
Simple answer: no. Sites such as Onevest and Fundable have given success to many businesses and start-up companies. Furthermore, these outlets are gaining more and more popularity rather than less. The industry was expected to grow over 92% in the year 2014 alone. In fact, the data analysis company Bitvore had one of the most successful crowdfunding campaigns to date with over $4.5 million raised through Fundable. The lesson learned – Take advantage of this invaluable opportunity!
As companies and professionals increase their use of online resources such as LinkedIn, EquityNet, and CircleUp, online crowdfunding has become a legitimate and feasible ways for businesses to raise equity and expand their network. Entrepreneurs need not shy away from this valuable tool, whether they already possess an established network, worry about the number of shareholders in their company, or question the transition from in-person to online. Think of crowdfunding as a way to include as many investors as possible in the opportunity to support your company. They may be waiting for one just like yours!