If you are looking for funding for your company, you will have already experienced that access to credit is not an easy matter.
Banks might consider a loan to your startup as too risky and finding business angels willing to help you is difficult.
However, there is an alternative and it is called equity crowdfunding.
Whether you are already familiar with it or have only heard of it, it is good to know the basic principles and how it works.
Equity crowdfunding, how it works
Equity crowdfunding is a specific form of fundraising through which investors participate in the financing of entrepreneurial projects by acquiring shares (equity) in the start-ups or SMEs they have decided to support.
To finance these companies, investors will have to go through specific online platforms accredited by Consob and at the end of the operation they will be full partners.
The investment will then entitle them to obtain any future returns or realise capital gains through the sale of their shares.
Everything simple? Not quite.
First of all, you need to know that equity crowdfunding is an “all or nothing” tool, which means that when you decide to launch a campaign you need to be aware that the money you raise will only come into your possession if the minimum fundraising target is reached.
You will need to prepare the necessary documentation with the help of experienced consultants and you will need to allocate an adequate budget for marketing, communication and promotion.
The good news is that these costs can be covered thanks to important subsidies.
For whom is equity crowdfunding suitable?
It is often believed that raising funds “from below” is reserved exclusively for companies operating in the field of technological innovation.
In reality, in many countries, and particularly in Italy, legislation allows access to equity crowdfunding for both innovative start-ups (active in many sectors, not only in the technology sector) and small and medium-sized enterprises.
Benefits and risks of equity crowdfunding
The first advantage of equity crowdfunding is undoubtedly that it offers the possibility of raising considerable sums of money in a relatively short period of time: considering not only the fundraising window but also the preparatory and subsequent activities to the launch of the campaign, we can consider that on average it takes about six months to make funds available.
In addition, online platforms allow the project to be presented to multiple investors at the same time, whereas traditional channels would require individual meetings with funders.
Finally, a further advantage is that through this form of share transfer, control of the company is retained, as the shareholders do not have a majority shareholding, although they have specific rights.
One of the risks for those who decide to opt for this form of financing is, as we have seen, the possibility that the campaign may not be successful and that therefore one may not be able to count on the desired influx of capital.
Furthermore, it should be considered that access to investment is ‘democratic’, i.e., open to any investor even with very low amounts of money. This can lead to new members being mostly inexperienced investors and therefore to a poorly qualified investment profile, i.e., not capable of disbursing large sums of money or acting as a mentor for the use of the capital raised.
Fortunately, however, Italian legislation stipulates that for a campaign to be successful, at least 5% of the funds must come from a professional investor. This is on the one hand a guarantee for small investors because it offers a sort of quality certificate on the goodness of the investment, and on the other hand a solid foothold for entrepreneurs and founders.
What you need to launch your campaign
You’re thinking that your business is ready to embark on this big adventure and you may have decided that crowdfunding is the best way to get the money you need to take your business to the next level. But, before you jump in, have you checked that you are really ready for crowdfunding?
First of all, you need to assess the suitability of your business against the crowdfunding model. Although there are many types of businesses that can be successful, not all businesses are suitable for this funding model.
Many founders tend to focus exclusively on their product, losing sight of other factors that determine a successful campaign.
They believe that a good product will undoubtedly be well received by the market and this is enough to get investors on board. However, a whole range of other factors need to be considered.
In particular, to do crowdfunding successfully, you should:
- Have already launched and tested their product;
- To be able to demonstrate first gains and show growth trends in the company;
- Have an initial community (consisting of customers or even a circle of friends and acquaintances) potentially interested in investing in our business, even if with small amounts;
- Having previously collected the interest of at least a few professional investors who can guarantee the success of the campaign.
Once these preliminary evaluations have been made, we can go even deeper to evaluate if and when to start our first round of financing.
Starting a funding round: aspects to consider
Maturity of the business. It is important to assess how far along the business is and whether the business idea is still in its infancy or has taken root. Established businesses have a higher success rate in an equity crowdfunding campaign. It is not necessary to have a fully established company or an established business model, but it is important to be able to work at least with prototypes or have numbers and/or projections that can support the claim of solidity of the project. If these requirements are lacking, the company will probably still be at an early stage and it would probably be preferable to opt for other forms of financing, turning to figures such as business accelerators.
Action plan. It is said that investors tend to enter a room backwards, always keeping the exit door in sight. Metaphorically speaking, this means that investors will want to know what your plans are for the business, how you intend to grow it and, ultimately, what the prospects are for a return on the capital they will have invested. Basically, what is needed is to structure a solid business plan.
Timing. How soon do you need the money? As mentioned above the timeline of an equity crowdfunding campaign does not just cover a few days. The pre-launch phase can take 3 to 4 months, and the fundraising phase takes at least another two months. It is therefore unthinkable to reach a funding goal through this instrument below 6 months.
Involvement. The importance of having a community ready to support the project has already been mentioned. However, it is equally important to carefully evaluate the time we have available to dedicate to the campaign. Not only because there are time-consuming activities to be carried out such as the preparation of the documentation, the pitch, the formalities or the structuring of the marketing campaign. Alongside all this, it should be kept clear in mind that even the best promotion strategy will not be able to do without the direct involvement of key figures in the company. Thinking that a campaign can stand on its own two feet and that the founders can just concentrate on the product and the business is a mistake in perspective that risks being paid dearly.
If you’ve made it this far, it means you’re really motivated to give your company a new chance through crowdfunding, but are you sure you’re really ready? Test yourself with our test.