Are you a founder wondering if raising capital via crowdfunding suits your business and your needs? Or are you already starting to raise online but would like more guidance on the process?
KingsCrowd’s 10-step guide to raising capital online will help founders and business leaders maximize their chances of reaching their funding goals with an online equity or debt crowdfunding round.
Step 1 – Ask yourself the right questions
Before taking any steps, you should determine what you want from a crowdfunding raise.
Begin by examining the purpose behind your fundraising endeavor. Are you seeking capital to navigate challenging circumstances, expand your business, or introduce a new product or service? Addressing this initial query is pivotal in determining the viability of crowdfunding as a solution. Demonstrating to potential investors that your company is poised for growth can pave the way for a successful equity round while showcasing a clear revenue generation plan can make debt financing a viable option. Regardless of the approach, skillfully narrating your story will be instrumental in attracting the necessary capital.
Crowdfunding isn’t just about securing funds; it also entails cultivating a dedicated community of investors supporting your business. Consequently, it’s crucial to consider whether you view this opportunity as a marketing tool and if you aim to foster a community around your venture. If affirmative, tailor your fundraising page and communicate with investors accordingly. Additionally, incorporating incentives or perks can further motivate them to invest in your product or service.
Another crucial aspect is determining the funding amount. Establish a minimum goal that ensures efficient capital utilization and delivers tangible results to investors. Simultaneously, set a maximum goal to avoid overcapitalization, which could dilute your ownership or strain future cash flows. Striking the right balance in setting these goals is indispensable for the success of your fundraising efforts.
Step 2 – Find the Right Security
Some entrepreneurs recognize that equity crowdfunding aligns with their company’s needs, especially when factors like delayed revenue generation, a risky business model, or a desire to allocate all available cash for company growth come into play. Conversely, other entrepreneurs may opt for debt financing to avoid relinquishing equity.
If you find yourself uncertain about the most suitable security for your fundraising campaign or wish to confirm your decision, consider posing the following two questions:
If your answer is “no” to either of these questions, debt financing is likely the more fitting option, as your company may not align with the expectations of equity investors. This could involve raising a traditional loan and reimbursing investors their principal and interest over a defined period. As of 2023, interest rates typically range from 5% to 15%, with many leaning towards the higher end.
Alternatively, consider a revenue share round, a type of debt where you commit to repaying investors a multiple of the principal while also sharing a percentage of your revenue. This structure proves advantageous if your revenue generation is slated for the future or experiences seasonal fluctuations. Despite this, you’re still obligated to repay the multiple of the principal by the loan term’s end. In 2023, multiples vary between 1.25x and 2x, with common terms falling around 1.5x-1.8x.
If your response is “yes” to both questions, an equity round may be the optimal choice for your business. You could decide to wait and issue shares, opting for fundraising through a SAFE or a Convertible Note. Alternatively, you may issue common or preferred shares for your fundraising efforts. Notably, founders are not required to reimburse funds raised through equity but will share financial returns with investors in case of a liquidation event.
Step 3 – Can you reach your goal?
Before launching a crowdfunding campaign, it’s crucial to analyze current trends to gauge the likelihood of achieving your fundraising goal. Kingscrowd’s market data offers valuable insights into crowdfunding trends over the past year.
Upon delving into the data, a discernible pattern emerges: merely 10% of companies engaged in equity crowdfunding manage to secure $1 million or more. Similarly, a mere 5% of companies opting for debt crowdfunding reach the $500,000 mark or beyond. Utilizing these benchmarks can provide a practical foundation for establishing your crowdfunding goals. However, it’s imperative to recognize that the funds raised by startups exhibit considerable variation, influenced by factors such as industry, traction, and other pertinent metrics.
To find out how much similar companies are raising online, you can use our company search table or our deal explorer and filter the results to find the closest to your company’s profile. You can also use our startup valuation tool to get an idea of the valuations and amounts raised by similar startups in the past years.
Last but not least, you will have higher chances of raising your goal if your company is exciting for investors. To differentiate your startup from other raises, you should highlight your differentiation, your execution capabilities, and the strengths of your team on your raise page.
Step 4 – Choose the right platform
Navigating the diverse landscape of crowdfunding portals and broker dealer offerings can prove to be a daunting task. The key to making an informed decision begins with selecting a platform that exhibits robust traction.
Prominent platforms such as Wefunder, Dalmore Group, StartEngine, and Republic have emerged as frontrunners, witnessing substantial activity in terms of both startups and investors over the past two years. These platforms boast a considerable deal flow, making them attractive choices for those seeking to raise equity. For instance, while featuring a smaller deal flow, Dealmaker Security has demonstrated a tendency for companies to secure over $2 million on average.
In contrast, the debt crowdfunding market appears more dispersed, with comparatively smaller overall market size. Wefunder and Republic, among others, stand out by offering both equity and debt deals. However, platforms like SBMX or HoneyComb are distinctively focused on providing debt deals.
Beyond assessing a platform’s traction, founders should delve into its specificities. Platforms like Republic uphold a stringent vetting process, exclusively accepting high-quality, vetted deals. Others, such as StartEngine, predominantly showcase common and preferred stock deals, emphasizing specific securities.
In the platform selection process, founders should meticulously consider the associated fees. While many platforms levy a percentage on the amount raised by startups, some may also seek equity in the startups and impose additional fees on investors. It is paramount to conduct a comprehensive comparison of portals and broker-dealer offerings, and for those with leverage, exploring negotiation possibilities is advisable.
Step 5 – Find the right valuation
When opting for equity fundraising, determining the appropriate valuation for your company becomes a pivotal step, and ideally, it’s beneficial to ascertain this early in the process.
Various valuation techniques, such as Discounted Cash Flow (DCF) or revenue multiples, can assist in assigning value to your startup. It’s prudent to refer to benchmarks to gauge investor acceptability. KingsCrowd’s startup valuation tool is a valuable resource for discovering the valuations of comparable companies that have undergone online fundraising. However, it’s worth noting that since 2021, many companies have tended to be overvalued. Consequently, you might consider aiming for lower valuations than suggested by our tool.
You can examine the median valuations of startups across different revenue stages over the past 18 months. This data provides valuable guidance for establishing your own valuation. It’s essential to recognize that a lower valuation translates to relinquishing more ownership in your company. However, it also renders your deal more attractive to potential investors. Striking a balance is key to crafting an appealing offer while ensuring a fair valuation for your startup.
Step 6 – Prepare your legal documents
When preparing for your online fundraising campaign, the documentation required varies based on your company’s stage and the chosen security for sale. The following documents are commonly necessary:
Some crowdfunding platforms offer support in preparing these documents, but if not, you may need legal assistance, incurring potentially expensive fees. Alternatively, services like raisepapers provide a more cost-effective and streamlined option.
For equity deals, a crucial decision is whether to pursue funding through Regulation CF (Reg CF) or Regulation A (Reg A).
- Regulation CF: Generally more straightforward and cost-effective, Regulation CF allows startups to raise up to a certain amount (e.g., $5 million) within a 12-month period.
- Regulation A: While more expensive and time-consuming to set up, Regulation A permits startups to raise up to $75 million. The Securities and Exchange Commission (SEC) conducts a more thorough review of the deal. It’s essential to be well-prepared with sufficient runway as the SEC’s approval process can be time-consuming. Carefully weighing the pros and cons of each regulation is crucial to making an informed decision aligned with your company’s needs and capabilities.
Step 7 – Prepare your pitch
Crafting a compelling, straightforward, and clear pitch is imperative to enhance your fundraising success. Your pitch should weave an engaging narrative that ignites investor interest and inspires them to back your venture. Companies with a compelling mission, like Recompose, or those boasting groundbreaking innovations, such as Timeplast, exemplify how a captivating story can translate into significant capital raised. Creativity becomes key for startups not falling into these categories—whether it’s spotlighting your customer journey or injecting humor, as demonstrated by Veer.
Your pitch format is equally crucial, employing a mix of videos, images, concise paragraphs, and strategically highlighted keywords to captivate and maintain investor attention.
In terms of content, leverage impressive metrics that set your startup apart from the competition. If you address a critical problem, offer a must-have product, or present a unique value proposition, investors are more likely to rally behind your cause. Share your personal story and emphasize that your team is the right fit for the business, recognizing that most investors are unfamiliar with you. Demonstrate resilience in navigating the challenges of entrepreneurship.
Furthermore, outline your growth strategy to showcase your capability to generate substantial returns for investors. Unfortunately, many companies overlook sharing their scaling strategy or revenue-generation plans. Back your statements with concrete numbers and evidence to instill confidence in potential backers.
Once your pitch is prepared, seek feedback from advisors, friends, and even strangers. Anticipate and address potential questions to ensure your pitch conveys relevant and comprehensive information to investors. Consider engaging a marketing agency, especially if you lack an existing community to support your raise. However, exercise caution regarding agency fees and consult with similar companies to gauge the agency’s potential return on investment.
Step 8 – Launch & get early traction
Achieving a robust launch and securing significant investments early in your fundraising campaign is a critical catalyst for success. This early traction not only serves as social proof but also acts as a magnet for subsequent investors joining your campaign.
Encouraging family and friends to invest at the outset can be instrumental. While transparency about the associated risks is essential, consider that if those closest to you aren’t convinced, attracting strangers to your cause may prove challenging.
Getting a large amount of investments during the first few days will also promote you on crowdfunding portals.
KingsCrowd’s data shows that the first 14 days are the most important in online startup raises.
It’s especially true for startups that raise less than $130,000. More than 95% of their investments happen during the first 14 days. It’s not surprising. These small raises are often way lower than what founders would like to raise. And when they cannot bring many investors on their journey, the first ones to invest — friends, family, and mentors — are usually the only ones to invest.
As the amount invested in deals increases, the funds seem increasingly spread over time. This makes sense. A successful raise attracts risk-averse investors or those who occasionally browse new opportunities in the online investment market.
Step 9 – Execute on your strategy
Once your fundraising campaign is live, meticulous execution of your strategy throughout its duration is key. Consistently sharing updates is a vital practice, fostering momentum among both existing and potential investors. Founders who highlight achievements like awards, product launches, or reaching significant milestones demonstrate to investors that they possess the capacity to execute their company vision.
Additionally, actively seeking coverage in third-party newsletters can open doors to new investor communities. As a founder, engaging in calls with potential investors capable of making substantial contributions is advisable. While not every call may result in an investment, even a 10% conversion rate can significantly boost commitments to your round.
As you approach the conclusion of your fundraising, strategically releasing exciting information can sway hesitant investors toward committing. Some founders may contemplate extending their fundraising period, and for equity crowdfunding, the success of such an extension often hinges on the amount already raised by the initial closing date.
For Regulation Crowdfunding raises, companies that collected less than $130,000 received around 25% more funding during a raise extension. For raises of less than $1.3 million, investors put an additional 47.9% of funds during a raise extension. And it seems like the more investors back a startup before an extension, the more they will invest post-extension. At least half of raises with pre-extension funding of more than $1.3 million got 94.9% or more of extra funding post-extension — close to twice what the company previously raised.
On the Regulation A side, only the companies that raised at least $1.3 million had a real chance to gather funds post-extension.
While these are median percentages and companies can raise more or less funding when they extend their rounds on a case-by-case basis, the data shows that pre-extension success tends to continue after an extension. At the same time, the rounds attracting the least amount of investments struggle the most to gather additional funding after extending their raises.
In any case, founders looking to extend their raises should always consider why their raise is successful or not in the first place — and if the momentum has a chance to continue or finally pick up after extending the raise.
Step 10 – Follow up with investors
A crowdfunding round doesn’t stop at the end of your raise. As a founder, you should leverage your crowd of investors. By sharing quarterly updates, you keep investors engaged and foster a sense of involvement in your company’s journey. This engagement encourages them to champion your product or service within their networks and positions them as more likely participants in your future fundraising endeavors.
These ten steps collectively guide you in defining and achieving success in your crowdfunding round. From meticulous planning and storytelling to strategic execution and ongoing engagement, each step is crucial in maximizing your chances of a prosperous crowdfunding campaign. And remember, your connection with investors can go beyond mere financial backing, turning your investors into advocates eager to promote your product or service and poised to join you in future fundraising endeavors.