With the success entrepreneurs are having raising capital with rewards based platforms like Kickstarter and Indigogo, many first time entrepreneurs are seeking the preparation advice from crowdfunding experts and people who have successfully raised capital on various platforms. Successful campaign owners have indicated that there is an extensive amount of planning to their crowdfunding success, and entrepreneurs would do well to thoroughly prepare for what is in some cases a significant expenditure of time and resources.
First however, we need to take a step back to realize that there are two types of crowdfunding campaigns an entrepreneur can start; rewards-based campaign (think Kickstarter) and a equity/debt campaign (think SME). With the introduction of equity crowdfunding, a new type of crowdfunder has emerged. This type of crowdfunder is concerned about getting their money returned to them with interest. In some ways, they may not see themselves in the same boat as the kickstarter crowdfunder, but instead see themselves as an investor in ventures, or a part-owner of a great business.
Crowdfunding platforms like Kickstarter operate on what’s known as a rewards model, where crowdfunders give money to a company with no intention of making a financial gain. Instead the crowdfunders receive a product in return for their contribution. In a rewards based model, entrepreneurs are pitching an audience that needs to feel some sort of emotional attachment to a product or service, or simply think the product is cool in order to contribute to the campaign. The benefit for project owners, who are not always startups, is validation of the marketability of their concept, a pool of early adopters, upfront cash of course, but also a more intimate connection between makers and enthusiasts.
With equity/debt crowdfunding, the crowdfunder is looking for a return on their investment, which means that your company, product, or service needs to show that it can generate sales, become self sustaining, and ultimately profit. The crowdfunder in this scenario may or may not have an emotional attachment to your company, product, or service. The most important question to be answered in preparing for an equity campaign is when and how you the entrepreneur intends to return the capital to your investors.
For the purpose of this article, we will focus on how to properly prepare an equity crowdfunding pitch. A good equity pitch should contain the 5 basic elements outlined below:
Who are you?
Surprisingly many entrepreneurs overlook this simple introduction and proceed right into what their product or service will do without ever qualifying who they are or their credentials. A good pitch will have a succinct and concise introduction, stating who you are and why you believe you are uniquely qualified to bring this company, service, or product to profitability.
If you are trying to start a technology company, did you once work for Google or Microsoft? Did you manage corporate sales at Louis Vuitton? Having direct experience in the industry you are looking to start your company in is the first step to instant credibility with your backers. Think about it this way, would you invest in someone who wanted to build a rocket ship but didn’t know the first thing about science?
Clear description of your product and/or service
Define your product/service in 15 seconds. Film producers are able to condense even the most complicated story lines into a 2 or 3 sentence synopsis. Communicate your idea as simply as possible with the understanding that the average attention span is extremely short. The majority of your backers will not have 10 minutes to spend understanding your product or service. At most, a potential backer will spend 2 – 3 minutes reviewing your entire capital raising campaign.
How are we (you/entrepreneur – me/investor) going to make money?
As previously mentioned, investors on equity crowdfunding platforms have an understanding that they are contributing to a campaign in order to get a return on their investment in a timely manner. Stating that you are going to simply build the product will not do. Investors want to know how you are going to sell the product and get your target audience to buy? . Is there any evidence that people are willing to pay for your product or service? If you remember one thing when pitching it is this: no revenue = no cashflow = no profit = angry investors.
How much you are looking to raise?
Don’t forget to ask for the money. The equity crowdfunders want to know how much capital you are looking to raise and whether or not you intend to raise money later. It’s better to explain your intentions upfront.
How much equity are you looking to raise?
Entrepreneurs should be very careful in deciding how much equity to give away. Sometimes new entrepreneurs believe equity is similar to an interest free loan that does not have to paid back. This could not be further from the truth. Equity is not like a loan or debt which can be paid off with no further obligations. When an investor takes equity in a company, that equity exists for the life of the company.
What will you do with the funds?
While the initial reaction would be to say that you are going to spend the money building the product or service, a specific breakdown of the use of funds is very important. For example, how much are you going to spend to acquire customers (sales and marketing), and who is going to be responsible for this effort? Breaking down your use of funds will clearly show equity investors that you have thought through this process and have a plan in place.
When will I get my money back?
This is a crucial component to getting equity investors to back your campaign.
With debt, you can establish an estimated payment schedule, whereas with equity, you can state your intentions to go public, get acquired by a larger company, or provide dividends to your investors.
What should be omitted?
– Long winded stories.
- While a long winded story about your childhood may invoke an emotional response from some investors, for the majority of backers that are looking to invest, they will see this as a distraction.
– Desperation
- Equity/Debt funders like to know that they are helping to bring your idea to fruition, not a company or entrepreneur who is declaring bankruptcy tomorrow. Appearing desperate will send red flags to your potential investors and ultimately derail your campaign.
How many times should you try to raise capital on crowdfunding sites?
– Raising capital whether offline or online is a time intensive process. At the very least however, if you prepared your campaign properly, you should see results within the first week of your live campaign. If after 7 days of a live campaign, not a single person has backed your company, product or service, it may be time to revise your campaign and perhaps take a look at why no one is attracted to your idea.
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