Myths about Equity Crowdfunding from an entrepreneur’s or businessman’s point of view (second part)
Equity Crowdfunding has been around for more than 4 years, at least “officially”. There are, however, misconceptions in the market about this alternative means of financing. These misconceptions hold back investors and company developers in the use of this innovative medium with so many advantages. Let’s detail the myths that currently hold back entrepreneurs, developers and company managers from using Equity Crowdfunding.
4. Equity Crowdfunding is too expensive.
Taking into consideration the hidden costs and time consumption of a “classic” round for the entrepreneur, this is completely false. As we stated in the previous post, loss of focus can be lethal for companies and by using an Equity Crowdfunding platform to raise capital, entrepreneurs and business owners could close rounds more quickly. This allows them to get back – even get on – with what’s important: growing their business.
Running an Equity Crowdfunding campaign has a cost. However, to raise up to 1 million euros, it requires only a few thousand euros. In a classic investment round there is also a cost in money, and even more in the amount of time spent by the entrepreneur in meetings with dozens of investors.
Fellow Funders requires a fee of maximum 5,000 euros for an Equity Crowdfunding campaign, which includes among other documents and services: a valuation and an objective valuation report (IVO), drafting of the partners’ agreement, due diligence and the preparation of all the legal and marketing documentation for the launch of the round.
Not to mention all the accreditation services, validation, legal drafting, documentation delivery, certificates, notarization, registrations and other operational management of the round.
Once the round has been successfully completed, platforms such as Fellow Funders usually charge a variable fee of between 4 and 6% of the capital raised. Thereafter, notary fees and the registration of the capital increase subscribed in the Commercial Registry will have to be added.
For CNMV (Spanish National Securities Market Commission) registered platforms, maximum fees in any form must be authorized by the regulatory body and also published in an easily visible place on your website.
However, Equity Crowdfunding campaigns are a great opportunity for brand awareness. Many companies set an advertising budget (mostly online) that can be around 1% of the round.
5. Capital can’t be raised from VCs or Business Angels during the Equity Crowdfunding round
False! It is possible! From the perspective of the law, Equity Crowdfunding is different from other types of rounds: it does not subtract, interfere or prevent the entrepreneur from pursuing other fundraising methods in parallel.
However, it can be complicated for the entrepreneur to open several fronts at the same time, therefore, it is preferable to carry out these actions sequentially. Starting with an Equity Crowdfunding campaign and ensuring its success will be seen as a positive signal by Venture Capital, which will facilitate the closing of the next round.
It is also a good opportunity to achieve synergies with the Equity Crowdfunding round. To this end, Business Angels and quite a lot of VCs are increasingly investing through Equity Crowdfunding platforms.
This is the case of the investment club Pinama Inversiones. “Venture Capital investment vehicles (like ours) spend a large part of their time searching for opportunities through various sources. For us, investing through Equity Crowdfunding platforms means benefiting from the scouting, rating and valuation work that our team of professionals (such as Fellow Funders), dedicated to originating, analyzing and debugging a large number of potential transactions. Equity crowdfunding is an alternative investment channel, both regulated and professional, that although it is in its early stages, is here to stay. Equity crowdfunding will grow in diversity of proposals and as a prelude to the listed markets,” says Miguel Angel Cestero, partner at Pinama Inversiones.
6. The market will know that I am looking for money.
So, what? What do Spotify, Snapchat and Slack have in common?
Over the past few months, they’ve been in the news for their successful funding rounds. Similarly, Uber announced its intentions to raise more than $1 billion last fall (and several times since).
These are public announcements from companies with a heavy reliance on investor confidence and positive valuation… We sincerely don’t believe it has hurt the world-renowned company.
It is true that technology companies are more closely observed by investors, especially when they announce a financing round. However, any strong, fast-growing company with a promising future does not worry about the whole world knowing that it is raising capital: often seen as a sign of strength.
That being said, the major Equity Crowdfunding platforms allow companies to protect information on the round that is distributed only to identified and accredited investors. The entrepreneur maintains full control over the information: they decide what information is disseminated, to whom it is disseminated, and who can see confidential information and when.
Within Fellow Funders, entrepreneurs have a virtual space where they can share all the information they wish with potential investors who are identified during the round in complete confidence. Likewise, after the round, the entrepreneur will report on the progress and main metrics of his project through the platform every three months.