Student entrepreneurs are massively interested in investors. I have worked with countless entrepreneurs over the last half decade, and there is a nearly mythological sense of wonder surrounding angel investors and venture capitalists. And while there are plenty of misunderstandings about investors, early-stage founders are universal in believing they need to court them to launch their companies.
For all this interest in funding, it is somewhat surprising how little student entrepreneurs know about equity crowdfunding. The reasoning could be that this method of funding has only existed since 2012, when Great Depression-era legislation was lifted to allow non-registered investors to fund companies in exchange for equity.
This was important because not just anyone can call themselves an angel investor. Angel’s invest their own money in startups, and they must have a net worth of $1 million or make $200K per year. Up until 2012 that kept the door shut on everyone else from truly investing in startups (note: backers do not earn any equity in Kickstarter, Indiegogo, etc).
The brilliant thing about removing these requirements is that it opens funding opportunities to cofounders that aren’t living in a major investor hubs such as San Francisco, New York, Austin, etc. This matters because the world is full of people with promising ideas for startups, and they can’t all live in Silicon Valley. Equity crowdfunding gives a chance to those living outside of major entrepreneurial investing networks.
Equity Crowdfunding at 3DS Global Roundup
I spoke with Nathan Roach about equity crowdfunding. Nathan is the CEO of MassVenture, and a key player in the legislation that changed the rules to allow the general public to invest in startups. He is also co-hosting a panel on equity crowdfunding at the Global Roundup conference in Austin Texas on July 9th.
The first thing to know is that equity crowdfunding isn’t easy or quick. Cofounders don’t simply sign up on MassVenture.com or wefunder.com, launch a campaign, and watch the dollars roll in. Fundraisers need to build relationships before the launch. “You need to market the hell out of this ahead of time,” says Roach. “You want to start with your inner circle and build out from there.”
Just like Kickstarter, media and viral marketing are crucial components of equity crowdfunding. But Roach emphasizes the need to be strategic. “Don’t start with a media blast. You need to have some backers first.” Media, bloggers, and influencers who hear about the campaign too early might see zero backers and walk away unimpressed.
One thing that may surprise entrepreneurs is the need to be transparent regarding their risks. The original regulatory rules existed to protect would-be investors from scam artists. This, according to Roach, has not been a problem.
“Criminals are lazy,” he says. “There is too much effort and due diligence required in equity crowdfunding, so scammers will just find an easier way.”
Regardless, entrepreneurs must disclose risks on the platform. Risks include things such as not generating enough revenue to cover costs, being overly reliant on a small team of cofounders, or banking on corporate partnerships that are in the early stage of development. The platform, in many cases, can be liable if a startup fails to disclose these risks, so this is not the place to fake it ’til you make it.
In many ways, equity crowdfunding is a novel option to fund your startup.
At the same time, according to Roach, founders play by the same rules as those that are trying to raise an angel round. They need to curate a network, build a product or service that solves a pain point, and communicate their vision gracefully. And of course they need to be able to execute and launch once they get funded.
What makes equity crowdfunding special is that it offers an option for those that are unable, because of geography or connections, to raise an angel or VC round.
Want to learn more about equity crowdfunding? Tickets are available for the 3DS Global Roundup conference, taking place at Capital Factory from July 7-9, 2017.
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