The Cocktail for Equity Crowdfunding Success

The Cocktail for Equity Crowdfunding Success

Following the crowdfunding industry over the past 3 years, I have had many theories on what causes campaigns to succeed or fail. Like most my observations included things like a strong social media presence, a succinct elevator speech and a sharp video kept to less than 90 seconds. These are the most common elements written and spoken about in the crowdfunding circles. In the case of reward-based crowdfunding they are certainly true.

All three are valid but none will be nearly as important in the world of equity crowdfunding. A company’s ability to attract investment will be hamstrung by the “no solicitation” rules set forth in Title III of the JOBS Act. Social Media and Viral Videos are not going to be an option in presenting any information beyond “Information available at XYZ crowdfunding intermediary”. Not the most exciting tweet.

Equity Crowdfunding will be much less about the hype and much more about the recipe. The recipe for the equity crowdfunding cocktail has only 2 parts. They are easy to say and far more difficult to execute. The recipe is as follows;

1 part Love, 1 part Valuation

1 Part Love

You chuckled when you read Love, I know you did but allow me to explain. Love in our cocktail is affinity for a brand or a company. Ever been a customer of a business where you found yourself thinking “I would LOVE to own a piece of this place”. These are the businesses that are always busy, the employees are always smiling and you are always happy to return. Want a starting point for knowing if your company is ready to raise money through equity crowdfunding, listen to the customers, do they LOVE your business. Have you overheard customers saying “I would love to own a piece of this business”. If you have, you’re headed in the right direction. An affinity customer is one that would LOVE to own a piece of your company, if you have one part LOVE, non-solicitation rules will never impact your crowdfunded issue. Your customers and friends of your customers will do all the marketing you need to attract the crowd.

Now the crowd has arrived and if you were running a rewards-based campaign, you would be well on your way to crowdfunding success (without the social media, viral video or elevator pitch).

1 Part Valuation

When raising funds through an equity crowdfunded offering, your company’s financials are on display. Regardless of how good your product, customer service and employees are, if your valuation does not make sense you will not get funded. Perhaps the best example in pop culture is “Shark Tank”. If you’ve watched the show, you have seen some great ideas, inventions and products that have been passed on by the Sharks. It’s one of two reasons, either the owner is wacky (and was put on the show for just that reason) or more likely the owner did not know how to properly value his/her company based on revenue, profit and realistic projections. The same will happen on a crowdfunding portal. Your affinity customers will bring the crowd but a few will point out that although you have a great product or service (and they will continue to be your customer), they will not be investing in your business. Those very same people who you overheard saying they would “love to own this business” will pass on the opportunity if you have not properly valued your offering. Most small business owners that have created an experience where customers LOVE their business are great operators but not financial analysts. I recommend getting an experts opinion on valuing your offering. That may be a business consultant, an accountant or a Zacks CF research report to value your business and the crowdfunded securities offering. You are the expert at building the Love, be sure not to lose the investing crowd on your valuation.

Continue to build your business with customers who LOVE to spend with you, find a proper valuation for your company and you will have the capital you need to grow your business (without begging a loan officer at the bank).