A guest post by Nathan Rose, Assemble Advisory.
The story is familiar, but that doesn’t make it any less sad.
It’s the story of the failed offer. Founders pour money down the drain through video, public relations, legal and advisory fees. They waste countless hours of preparation time over many weeks and months. The offering that they had such high hopes for doesn’t reach its target amount, and the founders are left with less money in the bank than they started with.
Are you about to make one of these equity crowdfunding mistakes that could kill your offering?
Before even approaching the funding portals, you should ask if yours is the sort of company that should be raising money from outside investors at all. And if so, is equity crowdfunding the best way to achieve that? There are many options for raising funds – government grants, bank loans, and investment from friends and family, to name a few.
The businesses best suited for equity crowdfunding can be separated into two camps:
• Products With A Crowd: Businesses with a large number of passionate users and a strong existing following for their brand, giving them the ability to bring their existing crowd along with them on the journey. e.g. wine, cosmetics, health foods.
• Potential Unicorns: Businesses with great scalability potential, giving financial investors excitement over the returns they could gain in the event you can achieve success and an exit down the track. e.g. software, biotechnology, medical devices.
On the other hand, equity crowdfunding isn’t suited for companies that:
• Have no existing traction (e.g. mobile apps with no users yet)• Plan to stay small (e.g. family-owned restaurants)• Could not function without the unique skills of the founder (e.g. consulting businesses)• Operate in a commodity space (e.g. parallel importers)
Contrary to the hype, the internet is not a place that will simply hand you money. Your efforts in the online world need to be supported with intensive preparation away from it. This is undoubtedly one of the biggest equity crowdfunding mistakes.
A well-structured campaign needs at least 2-3 months before the money can be raised, and founders who try to hurry this process along are much less likely to succeed. If your company needs to raise money in a hurry, then it is already too late for equity crowdfunding to work for you.
You and the portal will both be keen to keep things moving along – but let the process take its natural course. A half-baked offer will inevitably come across that way.
A smart company founder will choose to postpone or cancel their offer rather than launch it before they are ready. The very process of going through the steps required to launch sometimes convinces founders that they weren’t as ready to raise funds as they thought. Their offer may be more compelling, and their valuation expectations may be more achievable, after they have hit more milestones.
Choosing the right funding portal is as important to a successful offering as the choice of where a baker decides to open his shop front. Location, location, location. If you’re not promoting your offer where your potential investors are, you are like a bakery with no foot traffic passing by. It will be much, much harder to attract those that you need, and in the end you won’t have any dough.
The wrong funding portal can ruin your offer in many other ways – if they don’t have the expertise to advise you properly, or if your working style clashes with theirs, it will be practically impossible to create an effective campaign.
The choice of portals can seem overwhelming, but there is no better use of your energy than getting the portal decision right upfront. The people you have by your side throughout the process can make or break an offer.
If you needed open-heart surgery, you wouldn’t try to do it yourself. You’d put yourself in the hands of an expert.
One of the biggest equity crowdfunding mistakes is company founders consistently underestimate how much time and expertise are required into launching an offering – they come to the process thinking it will be much simpler and less time-consuming than it turns out to be.
You know your business better than anyone – that’s a given. But can you explain it to the investing public better than anyone? Can you self-produce quality media releases and video? Do you know what parts of your offer are holding you back? Can you navigate the different funding portal options?
Successful entrepreneurs understand their limits, and know the value of high-quality advice. Consider carefully what expertise you have internally and if you need help, ask for it.
A lack of momentum is one of the most frequent equity crowdfunding mistakes, judging by the failure rates across the industry.
At all costs, you must make sure your offer has momentum when it launches. A unique feature of crowdfunding is the full visibility investors have over how much you have already raised, and this little progress bar shows would-be investors the extent to which others have already backed you.
This “social proof” is far more powerful than you imagine. If no-one else has backed you, why should they be the first? By contrast, if the offer has already raised significant money, investors are incentivised to get in before the opportunity is gone.
So how do you get momentum?
One way is to galvanise your existing crowd. Before launching to the wider public, talk with your biggest fans and let them know your offer is on its way. Give them an incentive to join you early. Make your promotions high-quality and sharable, and you’ll have your audience literally counting down to your launch.
Another way is to have a credible lead investor. This could be an angel investor, ideally someone with expertise and a high profile within your industry – the sort of investors you might see on Dragons Den or Shark Tank. This lead investor should put in a decent amount of the raise themselves, so that on day 1 you can show that you’ve already got “smart money” behind you.
If your offer starts with nothing, chances are high that it will stay right there – at zero. If it’s still at zero (or close to it) after a week, your offer is effectively already dead, regardless of whether it nominally has another few weeks still to run.
People say the secret to business success is being prepared to fail more often. While this may be true in other areas, in equity crowdfunding it is the worst advice in the world. Get your offer right first time, because equity crowdfunding mistakes are terminal, and you will almost certainly not get another shot.
Nathan Rose, Assemble Advisory
Nathan Rose is the Director of Assemble Advisory, a consultancy for companies wishing to pursue equity crowdfunding campaigns. Assemble Advisory assists with picking the right platform, putting together offer content and financial models, and campaign management – allowing companies to raise money sooner.