Equity crowdfunding your start-up: An overview from Seedrs
One of the UK's fastest growing alternative finance options, find out how crowdfunding works in this explainer guide from Seedrs
Turning your business idea into a reality will often require capital to get it off the ground.
For most start-ups, it will usually take a continuous cycle of funding to keep on getting to the next stage until your business becomes successful.
There are a multitude of financing options for you to choose from but equity crowdfunding, via platforms such as Seedrs, is an excellent option.
Not only can crowdfunding platforms help you raise capital, they also offer a significant marketing opportunity which creates engagement with existing customers, can help attract new ones and will create brand evangelists for your company.
Here, the Seedrs team explain what equity crowdfunding is, and highlight some of the additional benefits it provides besides delivering capital and customers.
What is equity crowdfunding?
Equity crowdfunding enables start-ups, early-stage businesses and high-growth businesses to raise funds from a diverse range of investors.
In return for their capital, entrepreneurs exchange a percentage of the ownership of their company to investors. These will normally be made up from a combination of a few large investors and a greater number of smaller ones.
Previously, only venture capitalists and ultra high-net-worth individuals could invest in private companies but equity crowdfunding has made it possible to raise funds from retail investors too.
The core benefit of equity crowdfunding for you as an entrepreneur is, of course, that it acts as an effective means of accessing capital for your business to help you get to the next stage, but it comes with the added benefit of raising awareness for your business – more on this later.
How does equity crowdfunding work?
Investors typically view a range of pitches via an online crowdfunding platform, such as Seedrs.
The start-up founder or founders typically decide upon the amount of capital they require to raise and the percentage of equity they’re prepared to give up in return.
Most equity crowdfunding platforms work on an all or nothing basis, so the funding target must be met or the start-up won’t receive any of the funds.
How to set up an equity crowdfunding round
Firstly, you would work with an equity crowdfunding platform like Seedrs, to establish that this is the right approach for your business.
Typically, businesses that are innovative, growth focused and have a network that would be interested in investing, are well suited to equity crowdfunding.
Then you can move onto creating the pitch for your funding round. This will need to include:
- Fundamentals of how much you’re looking to raise.
- Shareholding in the company you’re offering.
- The valuation.
- The story of your business so far.
- How the funds that are raised will be used.
Your company and your pitch will then pass through internal due diligence checks by the platform, before being launched.
Most campaigns run for 60 days and you’ll need to meet your funding target to receive any funds at all.
Once the closing process is carried out, you will receive the funds you’re due and your shareholders will receive their share certificates.
What are the other forms of crowdfunding?
Besides equity crowdfunding, there are other types of crowdfunding including:
- Reward-based crowdfunding. Best for pre-launch and creative businesses. This is a bit like pre-ordering, with people providing funds in return for receiving the finished product at a later date. Sometimes entrepreneurs offer a discount against future purchases and/or other rewards. Investors do not receive a shareholding in the company.
- Donation-based crowdfunding. Often used by people seeking sponsorship for an activity they promise to undertake, with all money raised going to a named charity.
The added benefits of equity crowdfunding
On top of providing an injection of capital, equity crowdfunding brings some significant additional valuable benefits, including:
It represents an excellent marketing opportunity
For a crowdfunding campaign to be successful, the round needs to be promoted. Alerting potential investors to the round will give your company a marketing boost as it will be showcased throughout the campaign, creating brand awareness.
Equity crowdfunding gives you the chance to expose your business to new audiences.
At Seedrs, we provide a comprehensive package of marketing that includes digital marketing, email marketing, dedicated PR and even advertising on the London Underground.
You can create brand ambassadors
When existing customers become shareholders in your company, the relationship changes and they’re likely to metamorphosise from customers into brand evangelists.
They now have a vested interest in your start-up becoming successful, so they’re now far more likely to actively promote it to new potential customers and less likely to use a competitor’s service.
An equity crowdfunding platform’s reach can attract investors who were previously unfamiliar with your company but match your target demographic.
As well as investing in your round, they may also become regular customers of your products and services.
A raise can reach a diverse range of potential investors
Depending on which platform your company decides to raise on, you can receive capital from a wide community of investors, including:
- Family and friends.
- New and existing customers.
- Suppliers to the business.
At Seedrs we have a dedicated Investor Partnership Programme, which connects entrepreneurs with these larger investors:
- Family offices.
- High net worths
- Institutional investors.
- Intermediary partners.
Equity crowdfunding can take your business to the next level, whatever stage your business is at
Because early stage businesses usually require more than one round of funding, it’s important to choose a funding partner that can support you throughout the different fundraising stages.
Businesses at all stages raise on Seedrs, for example:
- Healthy ice cream makers, Oppo, raised £353,000 at seed stage.
- Digital bank, Revolut, raised £3.8m at growth stage.
- Leading English winemaker, Chapel Down raised £3.9m at the expansion stage.
The platform you choose should support your company beyond funding alone
There are generally two types of early-stage equity investment platforms; full service lifecycle and purely transactional.
With a full ‘life-span platform’, such as Seedrs, there’s valuable support for portfolio companies for the entire journey.
This includes clean structuring of the company’s cap table from the start with the Seedrs Advantage Nominee, so that it becomes easier to carry out further rounds.
Companies that successfully raise also benefit from membership of the Seedrs Alumni Club. This is specifically designed to provide ongoing expertise and help your business to succeed.
With a purely transactional platform, an entrepreneur’s relationship with it ends as soon as the campaign is completed without providing ongoing meaningful support.
Think equity crowdfunding could be right for your business? Visit Seedrs to find out more.