Dispelling the myths about Equity Crowdfunding from the entrepreneur’s point of view (Part 1)
Equity Crowdfunding has “officially” existed for over 4 years. However, out in the market there are some misconceptions about this alternative means of financing.
Even though it can generate significant advantages, misconceptions represent a significant deterrent to investors and business promoters for the use of this innovative system.
In this article, our goal will be to enumerate the myths that, at present day, hold back entrepreneurs, promoters, and company executives from using Equity Crowdfunding.
1. Venture Capital does not like Equity Crowdfunding
False. Even though this could be the case in the past, it is now the exact opposite! A successful Equity Crowdfunding campaign shows that stakeholders, and especially clients, support a company.
This is the case of Cervezas Dougall’s, a company that in their last round with Fellow Funders attracted 396 investors, most of them loyal clients of the brand.
Said outcome is perceived as a highly competitive advantage and service/product attractiveness by Venture Capital (VC). The value of Equity Crowdfunding is acknowledged by the best VCs.
“Equity crowdfunding gives entrepreneurs access to a new group of investors who might be great assets to their business. I welcome investing in crowdfunded companies. It means that a company has a large number of promoters before I even invest, which is guarantee for a VC or business angel.”Tim Draper, a famous American VC.
Entrepreneurs traditionally spend a great deal of time to raise capital and, sometimes, it could even become a full-time job in order to secure a good performance of the company’s business model. To be a little more efficient the first time, entrepreneurs need to know how things work. First rounds are often long and scarce in quantity, so having professional guidance is extremely important.
“Until a few years ago, investing in startups was still quite uncommon in Spain. Today we have a wide spectrum to choose from, and that always adds value. Also, only through Equity Crowdfunding the possibility of leaving a part of that investment to our own clients, workers, suppliers, etc. exists. The entrepreneurship canons have always spoken about diversifying investments, customers, banks, partners, etc. And now, the 21st century allows us to do so with investors thanks to Equity Crowdfunding.”Francisco Mariscal, Fellow Funders CEO.
2. Seeking financing through Equity Crowdfunding is bad for the company’s brand.
False. That is the gist of the matter. To be or not to be. The different types of financing platforms shall be understood. Some are open and do not select or perform any type of filter so anyone can quickly create a profile and search for capital. This can generate more noise than financing, and in fact it can be a negative signal for the market.
Nevertheless, other platforms like Fellow Funders make a rigorous and exhaustive filter. The latter type uses rating and scoring tools such as Fair Value, as well as analysts’ own work. Usually at Fellow Funders 1 in 50 submitted funding applications is accepted, that is less than 5%. This way, Equity Crowdfunding platforms become a quality seal that boosts the selected company’s brand.
Thanks to the Equity Crowdfunding campaign, companies obtain greater visibility for their own brand. This has been the case of BabyMico with its flagship product Rocking Baby. Blanca Garelly affirms that “thanks to the Equity Crowdfunding campaign launched through Fellow Funders, we achieved a greater notoriety for the Rocking Baby brand, especially after the article in Capital.”
Equity Crowdfunding is undoubtedly an excellent tool to grow in notoriety if it is done seriously and with the support of professional experts in the field.
3. Comment from an entrepreneur: “I already know investors, so I don’t need to use an Equity Crowdfunding platform!”
False. Equity Crowdfunding platforms really help to accelerate professional and non-accredited investors to join companies’ rounds of financing.
The entrepreneur has control over the fundraising and manages the round’s back office and its process through the platform. Platforms are also a central point to share information with investors anywhere in the world ensuring transparency and confidentiality.
Many entrepreneurs are using Equity Crowdfunding platforms for financing from start to end of the process because they function as catalysts. Investors can participate through them to actively seek to invest in the European business ecosystem. Too often, entrepreneurs are found out of the game weary of potential investors because they think that running the process alone is the only way to control their round.
Entrepreneurs can close rounds to raise capital in shorter periods by using Equity Crowdfunding platforms. This allows them to continue to grow their businesses, which is most important.
Joaquin Fernández-Villarjubin (Festibox), who raised 171,000 euros in a round with Fellow Funders, affirms that “while the round was underway with Fellow Funders, I was able to dedicate most of my time to grow the company and our flagship product CooltureBox. The Fellow Funders team made it easy for me as they took care of everything during that round.”