Equity Crowdfunding: Is It Right For Your New Business?

Traditional financing is generally off-limits to new business owners—as most banks won’t lend money to startups. But if you have a smart business plan, keen vision and a compelling story, you may be able to find investors online who are willing to provide you with funding in exchange for equity in your business.

A growing number of so-called “equity crowdfunding” websites connect entrepreneurs with prospective investors. But in order to boost the odds you’ll raise money, you need to focus on perfecting your pitch.

“Many companies think that if they just get listed on an equity crowdfunding site, they’ll get funding—but that’s simply not true,” says Bruce Virga, co-founder and CEO at Title3Funds, a Laguna Beach, California-based equity crowdfunding platform. “How you market the business and the opportunity is the key to getting funded.”

Startup crowdfunding options

You may be familiar with websites like Kickstarter, where entrepreneurs seek funding from people in exchange for rewards, such as free products or services. That’s an option if you don’t want to take on equity investors. But it might be difficult to raise money that way, unless you can find people who are excited enough about your business plan to be paid in product instead of cash.

Equity crowdfunding sites, on the other hand, can be a better alternative for entrepreneurs willing to give up a stake in their business (read: a share of their profits) in exchange for funding. There are now more than 70 equity crowdfunding sites, including StartEngine, SeedInvest and Wefunder.

Their growth has been spurred by a recent change to the Title III Regulated Crowdfunding section, which greatly elevated the amount that can be raised through crowdfunding sites from a little over a million dollars previously to now $5 million every 12 months.

How equity crowdfunding works

Sites have different rules and processes. Some require that you submit a formal business plan, while nearly all require a business pitch and financial statements. It can take anywhere from a few days to over a year for your application to be accepted. The sites may charge an application fee or a monthly listing fee, and typically they charge a percentage of the amount of money raised if successful.

“Equity crowdfunding campaigns have a lot of moving parts and also a lot of SEC regulations that need to be followed in regards to outreach timing and messaging that is allowed,” says Bob Bilbruck, CEO at Captjur, a strategy and consulting firm that works with startups, and founder of Startup Garage, a membership-based incubator and business accelerator.

Moreover, once your application is accepted by a site, you’ll need to file Form C with the SEC, which lists the amount of money you want to raise, Virga says. “You will be required to have a certified public accountant review or audit it, and while it’s not required, I recommend getting help from a financial advisor and a securities attorney specializing in equity crowdfunding.”

Once your Form C is submitted, you’ll be able to begin your marketing to prospective investors. The crowdfunding sites allow you to provide your pitch and handle the financial transactions involved—such as transferring the funding from investors to you while issuing share certificates or convertible notes to your investors.

Boosting the odds of getting crowdfunded

Before you spend any money on marketing, Virga suggests reaching out to your network. “Let your friends, family, customers, and business and social media connections know that you are on a funding portal and encourage them to invest,” he says. “When it’s time to market to outside investors, if they see that there is already money invested, they will be more likely to also want to invest.”

You should also consider creating a “founder’s video” that features you telling prospective investors about your business, Virga says. A marketing firm can help you create that video, or you can use an online tool such as Pitchtape. “Investors want to hear from the founders, about why they’re starting the company, and why it will be a good investment.”

You’ll also want to showcase your achievements to create momentum and show prospective investors that you’re working hard to get the business off the ground and grow it.

Founders who are successful at equity crowdfunding also often use social media and digital ads and work with crowdfunding newsletters to get the word out. They also use LinkedIn to do outreach to potential investors, while making sure to comply with the SEC rules for equity crowdfunding marketing campaigns.

While equity crowdfunding isn’t right for every business, it can be a good way to get the funding you need to take your new company to the next level.