Debunking 7 equity crowdfunding misconceptions

by Startacus Admin

The lowdown on equity crowdfunding and some common misconceptions care of upSTART 2018 Major Sponsors, Seedrs. 

"Equity crowdfunding can often be a shrewd way to fund a business. Yet there are certain misconceptions that could lead to an entrepreneur mistakenly discounting it as a viable funding option:

1. A capital injection is the sole benefit from equity crowdfunding

Not so. Although funding a business is the main objective of equity crowdfunding, there are other valuable benefits on top:

• It’s an excellent way to engage with existing customers.
• It may help a business to attract new clients.
• Equity crowdfunding may create brand evangelists who could help publicise the company.
• A business may receive crucial feedback on developing their existing service/product, along with opinions from investors on what else they’d like to see the company offer.

2. Managing a lot of investors takes lots of time

This depends on the equity crowdfunding platform you decide to go with. At Seedrs, because of the Seedrs Advantage Nominee  structure, a company may have many investors but will only need to deal with one: Seedrs. This also means that there won’t be a complicated cap table which may put off VCs from investing in the future.

However, if you opt for an equity crowdfunding platform without a nominee structure, it’s possible to have hundreds or even thousands of investors on the cap table, which can result in a tremendous amount of work and even delays if consents are needed on important decisions.

3. Equity crowdfunding platforms won’t attract investment from angels

Depending on the company that’s raising, angels, venture capitalists (VCs) and general investors may all invest. What’s more, angels and VCs look to equity crowdfunding platforms like Seedrs  as it often provides access to deals they would otherwise not be able to participate in.

4. The use of a crowdfunding platform will alienate VCs and institutional investors in future rounds

As long as the capital raised is wisely invested by the company, it may place it in a better position if an institutional round is desired in the future. And VCs may view an equity crowdfunded round as validation for the business.

At Seedrs we’ve witnessed many companies go on to raise further rounds exclusively with a VC or with a VC alongside the crowd. For instance, Landbay received investment from Zoopla and Perkbox raised alongside Draper Espirit.

However, it’s worth noting that without a nominee structure in place to manage shareholders, VCs and institutional investors may not be attracted to investing in a business.

5. Businesses choose to crowdfund as they can’t attract capital from angels or VCs

Equity crowdfunding should not be seen as a last resort. In fact, VCs diversify their portfolios by investing on Seedrs. For example, Beeline had both Seedcamp and Truestart  invest in their round. Many entrepreneurs view equity crowdfunding as preferable to taking on debt to fund growth as servicing it may put a strain on finances.

6. The platform and the crowd is all that’s needed

Entrepreneurs actually need to put effort into generating stories to create PR and they need to work on an excellent pitch.  They need to ensure that their contacts, customers, friends and family are all aware of their campaign.

Your pitch may be superb, but investors who hadn’t heard of your business prior to your pitch may not decide to invest until you’ve already reached a fair amount of the investment target. This is often because they want to believe a company has a decent chance of reaching the target before they’ll commit to investing.

7. Equity crowdfunding is the easy way to get funded

It takes an investment in thought, creativity and team engagement by the entrepreneurs and their teams to reach an investment target. However, at Seedrs we’ve put a lot of effort into making the process as efficient as possible."

Contact Seedrs – and avoid equity crowdfunding misconceptions.

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Published on: 16th June 2018