The Benefits of Equity Crowdfunding for Tech Companies

You’re a founder, you’ve made some good early traction, and now you're exploring how you can accelerate growth by taking on investment. You may be considering equity crowdfunding, and for good reason! 

Equity crowdfunding is a relatively new way for startups and early-stage tech companies to raise funds for their businesses. It is a type of crowdfunding that allows investors to purchase shares in a company, providing them with an ownership stake in the business. Whilst equity crowdfunding has some amazing benefits for the raising company, you should consider very carefully if it is the right strategy for your company. 

“Before you even start building your crowdfunding page, Start building a crowd first.”

Roy Morejon of Command Partners

How is equity crowdfunding different from other forms of crowdfunding?

Equity crowdfunding is a type of crowdfunding that allows investors to purchase shares in a company, providing them with an ownership stake in the business. This is different from other forms of crowdfunding, such as donation-based crowdfunding or reward-based crowdfunding, which do not offer investors an ownership stake in the business.

Donation-based crowdfunding involves individuals or organizations making donations to a cause or project without receiving any tangible benefits in return. This type of crowdfunding is often used for charitable causes or social impact projects. Gofundme is one of the biggest platforms for donation-based crowdfunding. 

Reward-based crowdfunding involves individuals or organizations contributing money to a project in exchange for a reward or perk. These rewards can range from a simple thank you note to early access to a product or service. Reward-based crowdfunding is often used by creative projects or product launches. Kickstarter is a popular reward based crowdfunding platform. Check out this tent designed to fit onto Teslas! They’re using Kickstarter to raise funds in return for sending backers one of their tents. 

Equity crowdfunding, on the other hand, involves investors purchasing shares in a company, providing them with an ownership stake and potential returns on their investment. Another key difference between equity crowdfunding and other forms of crowdfunding is that equity crowdfunding is subject to regulation by securities laws. These laws are in place to protect investors and ensure that companies comply with certain disclosure requirements. 

What are the benefits of crowdfunding for startups and early-stage tech companies?

  • Access to Capital: One of the most significant benefits of equity crowdfunding is that it provides tech companies with access to a large pool of potential investors. This can be especially important for startups that may not have access to traditional sources of funding such as venture capital firms or angel investors. Equity crowdfunding can be used to raise funds for research and development, marketing, and expansion into new markets.

  • Validation of Ideas: Equity crowdfunding can be used as a tool to validate the market demand for a product or service. It provides a platform for entrepreneurs to test the viability of their ideas by gauging interest and feedback from potential investors. This can help tech companies to refine their products and business strategies based on real-world feedback

  • Building a Community: Equity crowdfunding can help tech companies build a community of investors and supporters around their brand. By engaging with investors and supporters, tech companies can create a sense of loyalty and investment in their products or services. This can lead to long-term customer relationships and increased brand loyalty.

  • An invested army of promoters: In some cases, your crowdfund investors can be incredibly valuable lead generation tools. Whether you’re B2B, B2C, B2B2C, your investors will promote your company whenever possible. 

  • Marketing and Publicity: Equity crowdfunding campaigns can generate buzz and publicity for a tech company's products or services. By promoting their campaigns on social media and other online platforms, tech companies can increase awareness and interest in their offerings. This can lead to increased sales and revenue opportunities beyond the initial crowdfunding campaign.

  • Retaining Control: Unlike traditional sources of funding such as venture capital firms or angel investors, equity crowdfunding allows tech companies to retain control over their business. By selling shares directly to investors, tech companies can avoid giving up a significant portion of their ownership stake or control of their business.

Other funding options for startups and early-stage tech companies

  • Bootstrapping: This refers to funding a startup using personal savings, credit card debt, or loans from friends and family to start. All profit from revenue is then reinvested back into the business. Many hugely successful founders bootstrapped their company all the way to IPO. This is often the first source of funding for many startups, and it allows entrepreneurs to retain complete control over their business. However this is typically a slow process and the fast paced world of tech, slow and steady may not win out. 

  • Angel Investors: These are high-net-worth individuals who invest their personal funds in startups. Angel investors typically invest in the early stages of a company's development and may provide additional resources such as mentorship and industry expertise.

  • Venture Capital: This type of funding is provided by venture capital firms, which invest in high-growth startups with the potential to scale quickly. Venture capital firms typically invest larger sums of money than angel investors and often take an equity stake in the company. Whilst many VC’s claim to back early-stage companies, the vast majority require a significant ARR, making it non viable option for pre or early revenue companies. 

  • Revenue Based Fundraising: This is a form of loan backed against the company’s revenue, with repayments and interest taken from revenue. As such this is only really suitable for e-commerce or pure SaaS model companies. Uncapped, is an example of a company offering revenue based financing. 

  • Bank Loans: Startups can also apply for traditional bank loans to raise capital. However, banks typically require collateral and a track record of revenue, which can be difficult for startups in the early stages of development.

  • Grants: Some startups may be eligible for grants from government agencies, non-profit organizations, or private foundations. These grants typically have specific eligibility requirements and are often competitive.Furthermore, the grants may also only offer a % of project costs, meaning significant cash is still required from the company. 

How to do a crowdfund?

Planning and executing a crowdfund well is no small undertaking, and should be treated with the same detailed consideration as any other promotional campaign. Crowdfund’s require significant time and potential financial investment, but the general steps to success can be broken down as follows:

  • Define the crowdfund details: Start by clearly defining your crowdfund, how much you’re seeking to raise, how long it will run for, investment levels, whether you need to create a new share class, whether you will set a valuation or have the investment as convertible, and much more.

  • Choose a crowdfunding platform: There are many crowdfunding platforms available such as Seedrs, Crowdcube, Seedlegals, etc. Choose a platform that best fits your needs and research their fees, rules, and requirements.

  • Set up your campaign: Once you have chosen a platform, create a campaign page and a pitch deck and provide all the necessary details about your project or idea, including what you plan to do with the funds you raise, any rewards you will offer to backers, and a timeline.

  • Create a video and other marketing materials: A video can be an effective way to communicate your project or idea and encourage people to support your campaign. You can also create other marketing materials such as social media posts, emails, and press releases to promote your campaign. "n the digital era, engaging content is key to capturing attention. Convert your innovative ideas into compelling videos with this intuitive text-to-video tool. Ensure your message reaches a wider audience by adding subtitles, making your content accessible and easy to understand globally. For a smoother workflow, leverage an auto-subtitle generator to save time and focus on your campaign's core message. Enhancing your crowdfunding campaign with high-quality, accessible video content can significantly increase its reach and impact.

  • Set a fundraising goal and timeline: Determine how much money you need to raise and set a realistic fundraising goal. Set a timeline for your campaign, usually 30 to 60 days, and create a sense of urgency to encourage people to back your campaign.

  • Launch your campaign: Once you have everything set up, launch your campaign and start promoting it through social media, email, and other channels.

  • Engage with your backers: Respond promptly to any questions or comments from your backers, keep them updated on the progress of your project or idea, and show your appreciation for their support.

  • Fulfil your rewards: Once your campaign is successful, fulfil any rewards to your backers as promised.

What companies are doing equity crowdfunds right now?

  • RocketPhone 

A cloud phone system for Salesforce, RocketPhone, has already raised over $4 million and has now opened their equity crowdfunding campaign hosted by the Seedlegals platform. RocketPhone CEO Muj Choudhury gives his reasons for electing to launch a crowdfund “For too long the typical fundraising cycle has remained unchanged. Seed Round > VC Backed Series A > VC Backed Series B, all the way to IPO. For an individual like you and me, it’s near impossible to join this fundraising cycle and share in the extraordinary wealth generated when tech companies successfully exit.”

View the pitch here. 

  • Ortharize

Ortharize is an award-winning business travel platform that rewards staff for being price savvy and enables organisations to calculate their carbon footprint. With £117K turnover in FY '22, they are now raising to fuel their commercial expansion in a market forecasted to grow to $1.5 trillion by 2025.

View their pitch here

  • CrowdProperty

The UK's leading specialist property project lending platform. Our mission is to unlock the potential of small and medium sized property developers to build more, much-needed and under-supplied homes by transforming property finance.

View their pitch here

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