Crowdfunding has, in recent years, become one of the most popular and accessible forms of alternative finance, relying on a project’s target audience for funding rather than on large lump sums from banks or angel investors.
‘Donation-based’ and ‘rewards-based’ are currently the only crowdfunding models available in Malta, whereby supporters contribute small amounts of money with no expectation of anything in return, apart from a small gift as a gesture of thanks.
However, other crowdfunding models are also fast gaining global popularity, such as ‘equity-based’ crowdfunding. This model offers potential backers or investors the chance to own a part of the project and thus enjoy some of its long-term profits or benefits.
Here’s everything you need to know about Equity Crowdfunding.
What is Equity Crowdfunding?
This crowdfunding model still does as its name suggests: raises funds via the crowd. However, the project owners sell securities, such as equity in the company. The project owner has complete control over the offering, what they want to sell, at what price, and how much capital they wish to raise.
The equity-based model is gaining momentum particularly as a source of initial funding for start-ups and small businesses, where individuals can invest in an enterprise or company in its early stages. As a platform in which investors can explore different investment opportunities, in the hope of making a profit should the company grow, equity crowdfunding has opened the door to a larger pool of potential investors and made the investment arena more accessible.
What are the Benefits of Equity Crowdfunding?
By offering the crowd the chance to invest in your fledgling company through equity crowdfunding, it’s not just the wealthy investors who can pledge to your cause. By reaching a broad spectrum of investors, the model gives easier access to capital, while increasing the visibility of the start-up brand.
As with all crowdfunding models, equity-based also gives the new company the unique opportunity to validate the business model or idea with its target audience, in a relatively low-risk environment. Through this two-way communication with the company’s audience from the start, this also boosts customer retention and creates potential Brand Ambassadors, as well as building a network of long-term investors and supporters for the company.
Are there any Potential Drawbacks of Equity Crowdfunding?
The success of any crowdfunding campaign, and whether it reaches it funding goal, depends not just on how well the campaign is planned, but on how well the project is received by the crowd. In the case of Equity crowdfunding, this has larger implications since, if the campaign doesn’t meet the desired funding target, then there may not be enough investors with whom to start the enterprise.
Add to this a highly-competitive market in which other competing start-ups are also presenting their ideas for investment, and the chances of your start-up idea succeeding, after having failed to secure enough funding the first time, decrease even further.
While crowdfunding lowers the risk associated with traditional start-up funding methods, equity-based can increase the risk of people stealing the concept in its early stages, since you will be showing your business idea and presenting valuable information before it has generated enough capital or momentum.
What Should I Consider Before Trying Equity Crowdfunding?
Planning and research, as ever, is key to success in all crowdfunding models, including equity-based. Take the time before launch to research and build your audience, sourcing willing investors and testing your idea and pitch to ensure that that your concept is of interest to customers, that it provides quality and value, and that your mission and goals are clear.
Your pre-launch planning should also include the creation of a comprehensive business plan and strong communication strategy that creates trust with your potential investors, promotes the product, and keeps customers regularly updated. You may also attract a larger audience if you are able to share how equity crowdfunding works. It pays to be ready for any and all queries, so that you can keep momentum going, not just throughout the campaign, but well after the funding target has been reached and your enterprise is preparing for its next step towards long-term success.