This article was originally published in the Union Leader on July 21, 2024.
As of 2016, there’s a new kid on the block for raising capital. And no, we aren’t talking about crypto.
Traditionally, founders rely on friends and family, angel investors, or Venture Capitalists (VCs) to finance early-stage startups. However, raising capital to build and scale is a major challenge, and time spent fundraising is time not spent building the business.
Enter regulated investment crowdfunding. There are two types: debt and equity crowdfunding. We’ll focus on equity crowdfunding, the primary alternative to VC and angel investments.
Unlike Kickstarter or Indiegogo, where you raise money and send rewards, equity crowdfunding raises capital by offering equity shares in the business. This democratizes investment, allowing anyone, not just the wealthy, to invest in startups.
Regulated by the SEC’s Regulation Crowdfunding (Reg CF) introduced in 2016, equity crowdfunding lets companies publicly solicit investments (e.g., by telling your friends and posting on social media), raising up to $5 million annually. In 2024, the average investment size was $1,600 per investor, offering financial upside and equity stakes to investors.
Why should founders consider equity crowdfunding as an alternative source of capital?
First, it eliminates traditional VC gatekeepers, allowing a more diverse pool of investors. Founders maintain control without the pressure of giving up board seats that VCs often ask for.
Moreover, raising capital via equity crowdfunding comes with more benefits than just the capital.
Turning customers into investors fosters brand loyalty and higher customer engagement. Often, some of your smallest supporters by dollar amount may become some of your most helpful brand champions. A study by Bain showed that customers who invest in a business drive 54% more value into the brand – meaning increased spend and a higher customer lifetime value (LTV).
What if your company is more business-to-business (B2B) focused and not a consumer product?
Kingscrowd – a leading platform for startup fundraising and investment analytics – has data showing that both B2B and B2C companies successfully raise capital through crowdfunding. In fact, some of the most successful online funding rounds ($3 million or more raised) of 2023-2024 were by B2B companies.
So what type of success can you expect if you attempt an equity crowdfunding raise?
In the first half of 2024, startups raised over $274 million on platforms like Wefunder and StartEngine. The average company raised $366,000 in 121 days. Success often hinges on active promotion and engagement with potential investors.
As with many things in life, we at Kingscrowd tell founders that you’ll tend to get out of it whatever you put into it. That is, don’t expect that you’ll draft a campaign page, create a video, and the money will start flowing in. The most successful founders are hustling day and night networking at events, messaging potential investors on LinkedIn, and reaching out through podcasts and newsletters to get in front of new audiences.
Whether you need $50k or $5 million, equity crowdfunding offers a legal way to publicly raise capital. Major VCs are even recommending it to their portfolio companies for audience engagement and PR. Notable examples include beehiiv (Lightspeed-backed, raised $1 million) and Substack (Andreesen Horowitz-backed, raised $5 million).
How and where can you get started?
First, check out some of the online funding platforms – like Wefunder, StartEngine, and Republic – to assess what types of deals are offered and which platforms could be a good fit for your company.
Second, preparation is key. Ensure your financials are in order, craft a compelling story, create engaging content (like a pitch video), and plan your marketing strategy. Engaging with a community early can also build momentum before the campaign launch.
We are moving towards a future where everything will be digitized and fractionalized. The days of flying to meet investors and tracking down checks are slowly being replaced by more modern means, and this is one of the first steps. Investors everywhere will be able to take part.
In this evolving landscape, your startup’s success might not hinge on securing a few big-name investors, but rather on winning the support of a dedicated community.
About Brian:
Currently Head of Product at Kingscrowd, Brian is a seasoned tech leader with a rich background in engineering, venture investing, software development, and entrepreneurship. He has made over 220 angel investments on platforms like AngelList and Wefunder and serves on the Board of Directors at New England FIRST and the Crowdfunding Professional Association (CfPA).