Funding drives small business innovation. But in the wake of the Great Recession, commercial lenders and other funding sources have tightened their criteria, leaving many small companies underfunded and unable to leverage innovation as a driver of business growth.
Equity-based crowdfunding, or the process of raising capital through small investors in exchange for ownership shares, is emerging as a potential answer to the small business funding dilemma. In some cases, equity-based crowdfunding could be a tipping point, providing capital-starved entrepreneurs with the final piece of equipment, additional personnel or distribution expenses they need to take their companies to the next level.
Equity-based crowdfunding mechanics
In April 2012, the JOBS Act eliminated legislative restrictions and cleared the path for small companies to leverage equity-based crowdfunding as a viable funding strategy. The SEC was given 270 days to create guidelines and enact the legislation, which for the first time will allow entrepreneurs to raise as much as $1 million by selling shares in private companies to the general public.
After equity-based crowdfunding receives the green light from the SEC in early 2013, it’s expected that the majority of these investments will be transacted on web-based platforms like EarlyShares.com. By participating, small companies can directly pitch their business plans to thousands of like-minded individuals who are collectively capable of funding the company’s capital needs.
From the investor’s point of view, this could mean a great opportunity to invest a little amount of money on what could be the next big idea, and own a small amount of equity in return. It is a win for both sides. Once equity-based crowdfunding kicks into action, the opportunities and industries it will impact are endless. Any small business – startup or expanding – from any industry can pitch its need for funding, as long as it passes the due diligence tests that will be required by the SEC in order to avoid misrepresentation.
Ultimately, this will attract investors that either have experience with that business’ industry or are intrigued by the promise that particular company offers – a connection that was almost impossible in the past. The opportunities are limitless.
Leading up to its implementation, it’s important that small businesses learn more about how equity-based crowdfunding works and even practice their funding pitches. EarlyShares has launched a free roadshow across the country to educate small business owners and potential investors on the opportunities equity-based crowdfunding presents and how it is different than regular crowdfunding. Additionally, the company is currently sponsoring the Small Business Challenge. Through Oct. 31, small businesses can enter or be nominated to compete for a share of $50,000 to create new jobs – a capital influx that can be used to hire new employees and help grow their companies. The competition is a great way for small businesses to test out their ideas and pitches on a smaller scale.
Equity-based crowdfunding tips for small businesses
Although crowdfunding holds promise as a catalyst for small business innovation, a successful campaign is not a slam dunk. Crowdfunding hinges on entrepreneurs’ ability to effectively recruit potential investors and supporters to their cause. And because crowdfunding relies on large numbers of small investors, you’ll need to develop a strategy to market your opportunity to the masses.
- Create a persuasive pitch. Successful crowdfunding begins with the creation of pitch for prospective investors. Like any other serious investment pitch, emotional appeals should take a backseat to hard numbers. To entice investors, your crowdfunding pitch will have to build a concise case using accurate benchmarks, solid projections and realistic ROI estimates.
- Leverage social networking. The most successful crowdfunding pitches leverage aggressive social networking campaigns, broadcasting funding opportunities via Facebook, Twitter and other popular social media sites. Ideally, your social networking efforts should feature two-way dialogues and make it easy for prospective investors to share your company’s funding opportunity with other people in their circles of influence.
- Incorporate equity-based crowdfunding into a broader marketing strategy. It’s a mistake to approach this as an isolated finance function. Prospective investors will likely research your business online before they make a commitment, so it’s important to integrate equity-based crowdfunding into your company’s larger marketing strategy and ensure that the messagescontained in your pitch are consistent with the messages across your entire multichannel marketing program.
Equity-based crowdfunding isn’t a panacea for all of your company’s funding challenges. But with the right strategy and a lot of hard work, it’s possible for small companies to use it as a catalyst for the kind of innovation that drives sustainable business growth.
Maurice Lopes is the CEO and co-founder of EarlyShares.com, which was conceived out of his frustration in the lack of resources afforded to small business owners. EarlyShares.com is dedicated to bridging the funding gap for small business entrepreneurs through equity-based crowdfunding.