Equity Crowdfunding: A Three-Way Hybrid

Nathan Rose,

The content of this article has been adapted from Equity Crowdfunding: The Complete Guide For Startups And Growing Companies, launching on Amazon on November 1.

Equitise subscribers can download the entire book for FREE, this week only. Click here to download.

There are numerous ways to fund the growth of business – a company can get money through product sales, through investment from friends and family, borrowing money from a bank, gaining a government grant or through seed money provided by a startup accelerator. Each of these ways will suit different businesses at different stages of their development.

Equity crowdfunding has arrived on the scene in the last few years as another alternative, with its own advantages and disadvantages. It can be quite accurately described as a three-way hybrid between venture capital, the ‘rewards’ crowdfunding offered by sites like Kickstarter, and initial public offerings. Let’s look at some of the key similarities and differences between equity crowdfunding and its three closest cousins.

Equity crowdfunding vs. venture capital

Venture capital investors can be a valuable partner as a business grows. They take an active interest in helping the company expand, providing expertise in addition to their money. This active role is one reason why some companies prefer venture capital to equity crowdfunding; they get to deal with a small number of large investors, who are highly incentivised to drive the company forward. Equity crowdfunding has its own advantages, though. Notably, it is much better for publicity. Customers can be gained through the exposure generated by a campaign, as can new suppliers, board members, and other partnerships. When you put your company out there in such a public forum, people will notice and be attracted to your company in many ways. Conversely, a deal with venture capital is done behind closed doors.

Another advantage of equity crowdfunding is the ability to more strongly retain a company’s culture. The venture capital industry is still mostly male, and tend to come from similar backgrounds – elite universities and the corporate world. Among the melting pot of diversity that entrepreneurs represent, naturally some won’t gel with this “VC culture” – these entrepreneurs are not necessarily less worthy of being funded, but submitting themselves to a culture they don’t identify with is anathema to some of them. The ability to retain full control of their company culture, by having more small investors is attractive to many startups.

Equity crowdfunding vs. rewards crowdfunding

Rewards crowdfunding and equity crowdfunding campaigns look and feel similar to each other – they have video, a public Q&A forum, and payments done through an online platform. But rewards crowdfunding offers people the chance to back you in exchange for a reward (such as a product or experience), while equity crowdfunding investors get shares in the company in exchange for the cash.

The biggest advantage of rewards crowdfunding is that the founders get to raise money without giving up any shares in their company. They gain customers, not investors. Therefore, if they go on to sell their company, the founders will not need to share the proceeds with the crowd. There are also fewer barriers to launching a rewards crowdfunding offer. A company will not be subject to such intensive checks from the platform, and there are fewer regulations involved. This means rewards crowdfunding can be used to raise money with less time and expense involved.

Still, there are reasons to go through with an equity crowdfunding campaign. For one thing, equity crowdfunding typically raises a lot more money. Yes, rewards crowdfunding campaigns have raised hundreds of thousands and even millions of dollars. But this level of uptake is very uncommon. Anyone can launch a Kickstarter campaign, but not anyone can close one with a meaningful amount of money raised. You might be the one to beat the odds, but when it comes to raises in the six figures and up, the success rate with equity crowdfunding is much higher. Equity crowdfunding is also suitable for more types of businesses. Rewards crowdfunding can work great for B2C products, but what if you are in the business of something very expensive (like industrial equipment) or difficult to understand (like software)? Equity crowdfunding enables B2B businesses, more-established businesses, and businesses which aren’t naturally public-facing to raise funds.

Equity crowdfunding vs. initial public offerings

Both equity crowdfunding and initial public offerings are offers of shares in a company to the general public. However, equity crowdfunding is handled through an online platform, without the need for brokers. Another difference is that raising money through the stock market requires preparing a prospectus, which is a very long and prescribed document, requiring lots of input from expensive lawyers and investment bankers. Equity crowdfunding is therefore simpler and less expensive than an initial public offering, and within reach of companies at an earlier stage.

Even though funding startups and growing companies is what equity crowdfunding is best known for, it is not limited to this. Companies at later stages of development can still use an equity crowdfunding. For example, in 2015, Equitise partially crowdfunded the initial public offering of Chinese agricultural giant Dongfang Modern. At the time, Dongfang had annual revenue of AU$133 million — hardly a startup. Offers like this point to the possibilities of equity crowdfunding: new options for a whole new audience of investors who prefer yield, diversification, more-established businesses, and immediate liquidity.

One great thing about equity crowdfunding is its ability to work together with these other methods. Venture capital firms and angel investors can invest in equity crowdfunding campaigns alongside the public. Many companies have done both a rewards crowdfunding campaign and an equity crowdfunding campaign to take advantage of the benefits of both. And as we saw with Dongfang Modern, initial public offerings can included a crowdfunded component. So think of equity crowdfunding as not being “instead of” these other methods, but instead, as being complimentary to them.

If you enjoyed this article, you can read a comprehensive overview of equity crowdfunding by downloading Nathan Rose’s new book, FREE on Amazon for this week only, featuring even more insights from Equitise and many other platforms from around the world.

Click here to get your copy.

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