This is Part 3 of our Series on “What Founders Should Know Prior To Equity Crowdfunding”. You can read Part 1 on “Marketing” here and Part 2 on “Ad Spend” here.
Over the last 7 years, I’ve raised $150mm for my own companies mostly via equity crowdfunding, whether it’s via Regulation A+, Regulation CF, or Regulation D. I’ve seen the good, the bad, the ugly and the best when it comes to all facets of setting up and running an equity crowdfunding (“ECF”) campaign. I’ve also worked with many of the major portals and technology providers and have raised for companies in various stages of their lives.
People always think that ECF is all about marketing and ad spend. But there’s way more to it, and there’s a lot of other advice and tips about raising capital online. Check it out:
- Delegated and/or Outsourced Fundraising
This is a big one – when you are raising money traditionally for your company (e.g. through angels, friends and family, venture capital, etc), it is like a second job for a CEO or Founder. Potential investors want to speak to the CEO, and it’s rare that you close in your first meeting. Each meeting is likely 30 minutes or more, and there’s at least a few of these per investors, plus you usually get a lot of no’s. Do the math, you will likely take 100 or more meetings when trying to raise millions of dollars. Fundraising is important for a company, but it also takes away from growing and running the business. One of the great things about raising capital through equity crowdfunding is that it’s a method of fundraising that can be delegated or outsourced to another party or parties. Because it’s a programmatic way of fundraising, the CEO does need to spend time pitching every single potential investor. Instead, social media, digital marketing, press, email marketing, retargeting does the heavy lifting. This can allow the CEO and executive team to focus more on running and growing their business.
2. Valuation, Valuation, Valuation
One of the great things about ECF is that you can set your valuation; this is also one of the bad things about ECF. It’s common for founders to aim too high on their valuation when pricing an ECF round. Why not? A higher valuation results in lower dilution, which is a great story for a founder, employees, and existing shareholders. It’s true, all things being equal, the crowd is likely OK to pay more than a traditional investor would, as they are investing less on average. And when there is a cost of capital in an ECF (see Part 2 in this series), a common strategy is to increase valuation on an ECF so that your dilution after accounting for ad spend is similar to what you might have seen when raising capital via traditional means, albeit at a lower valuation.
A piece of advice: don’t get too greedy on valuation when pricing your round. If you keep raising via ECF, you’ll likely keep raising valuation, and that can snowball to the point where you’re way overpriced based on anything realistic. And more likely than not there will be a day of reckoning, and nobody likes a huge down round.
3. Audits and Reviews always taken longer than you think
Financial audits and reviews are a part of the ECF process whether you like it or not. If you want to raise money via Regulation A+, you’ll need a two-year audit and if you want to raise money via Regulation CF, you will need either a two-year financial review or a two-year audit depending on how much you wish to raise. All founders think a review or audit will be faster than it really is. If you have a company with real operating history, you may not have the cleanest books or have kept track of invoices and receipts as well as you should have. It takes time to close the books properly and it takes time to locate old receipts. And if you don’t have a full time head of finance or bookkeeper, it’ll take even longer. If you’re a start-up, you or your team are likely busy with a thousand other things, and more often than not, the audit process is not a top priority because 1) it’s not fun to do and 2) you’re busy running the company. Also, auditors are busy with lots of clients and aren’t always as responsive as you want them to be, especially during the busy season (February through April). Make sure you plan for that as well. In my experience, the reason ECF rounds tend to launch later than planned is usually because of delays in the review/audit process.
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Atlas Rd specializes in guiding founders through the process of raising money via equity crowdfunding. We help oversee all facets of a campaign, including marketing, legal, regulatory/compliance, accounting, finance, and investor relations.
Interested in learning more about raising money online? Email us at info@atlas-rd.com.
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