Recent capital-raising option may be a better fit for some inventors
In equity crowdfunding, an equity stake (stock shares, convertible note, etc.) in the company is offered in exchange for a pledge or investment.
BY HOWIE BUSCH
There are so many ways to get your product to market. In this space, we’ve talked about some of the most common methods:
- Licensing to another brand/manufacturer in exchange for royalties
- Manufacturing by yourself
- Crowdfunding on platforms such as Kickstarter or Indiegogo
But there’s another option that’s a little newer, and intriguing: equity-based crowdfunding.
Traditional crowdfunding campaigns are generally for consumer products and/or creative endeavors, such as funding a movie or a music CD. With consumer products, you “back” a project, which means that you are pre-ordering the product.
This enables the inventor/campaign creator to do two things: assess whether the market is interested in the product; and go to a manufacturer with an actual order in hand, as opposed to ordering several thousand units and hoping people will buy.
As an example, I launched DudeRobe with a Kickstarter campaign. Backers supported the campaign with a pledge or a pre-order (the robe cost $74) and with all of those pledges/pre-orders, I manufactured the product. They would receive the product a few months later, making their pledge more of a pre-order for the product.
With nearly $80,000 in pledges/pre-orders (from Kickstarter & Indiegogo), I knew there was a market for the product. As important, I was able to go to the manufacturer with a real order in hand rather than placing an order for 5,000 units and hoping I could sell it.
So, the traditional crowdfunding route enabled me to de-risk my path to market for my invention—as it does for so many inventors.
The main difference between traditional and equity crowdfunding is that in equity crowdfunding, an equity stake (stock shares, convertible note, etc.) in the company is offered in exchange for a pledge or investment.
Although some companies choose to offer their product as an enticement, the goal is to raise money to operate and/or expand the company, as opposed solely to manufacture the product to fulfill the orders from backers.
In equity crowdfunding, proceeds can be used for inventory, marketing, hiring employees, as well as to develop and manufacture a product. In traditional crowdfunding, the money must go to manufacture the product to give the backer the benefit of his or her bargain for the pre-ordered product.
Equity crowdfunding came into existence in 2016 with the JOBS Act. The acronym derives from Jump-start Our Business Start-ups. It expanded options for entrepreneurs to seek out everyday (non-accredited) investors to raise capital and grow their companies via online crowdfunding platforms.
By opening equity crowdfunding to non-accredited investors, the JOBS Act gave small businesses and early-stage start-ups an alternative method of raising early capital, adding to other, more traditional early capital-raising options. These include bootstrapping, friends and family, angel investors and small business loans.
Traditional crowdfunding is great for consumer-facing products. But what if your invention or innovation is more of a business-to-business play, or a software?
In that case, going the traditional crowdfunding route may not make sense, and equity crowdfunding might be the right route.
But remember, there are plenty of similarities. In fact, if you look at any of the big equity crowdfunding platforms, they look very similar to Kickstarter and Indiegogo. The three biggest platforms are StartEngine, WeFunder and SeedInvest.
How to succeed
The most successful equity crowdfunding campaigns do a good job with:
- Narrative/Storytelling. Whatever your product or company is about, make it compelling.
- Assets. Be sure to put together a great video with great pictures so that your campaign page does a great job of selling your product, service and you.
- Management/Founder Background. Are you the best person to run the company? If so, why? If not, who can you add to the team who will give an investor confidence?
- Financials (including revenues and valuation). If you have a good financial story to share, great—but maybe you’re pre-revenue or don’t have great sales. If that’s true, make sure the other elements are really good.
- Bringing People to the Party. Much like traditional crowdfunding, you can’t just put a campaign together and expect people to invest. You have to get your friends, family and colleagues to invest early to give you some momentum so that others take notice.
Nail these crucial areas, and you stand a very good chance of raising the capital you seek.
One of the most underrated advantages of equity crowdfunding is that investors, in addition to providing needed capital, can become an army of brand ambassadors. After all, with a stake in your company, they will be more likely to share your company with their friends, family and colleagues—not to mention that they’re more inclined to keep buying from you (assuming you’re a consumer product).
And if you are an inventor reading this, keep in mind that it’s always good to support other inventors and innovators. If you think an inventor/product developer has a cool product that you could use, or he or she has a cool business model and you think the company will succeed, why not give support?
After all, when you launch your product, whether on Amazon, Kickstarter, Indiegogo or one of the equity crowdfunding platforms listed here, aren’t you going to want the inventor community to support you?