Equity crowdfunding has become a viable option for a lot of startups to raise funds without looking at institutional investors like VCs, but is it really a good option for them? Are startups sacrificing strategic insight and network opportunities by bypassing the traditional investment route?
We explore this topic by speaking to three startups – SmartBite, AdEasy and Deemples. The first two successfully raised investment through crowdfunding, while Deemples explored the idea and decided against moving forward. We speak to them to understand more about their experience.
Why crowdfunding is so attractive to startups
Raising money may seem easy, as we look at the billions being given away to companies like We, but in reality it is a grueling and often unsuccessful effort by many a founder.
SmartBite CEO and Co-Founder, Gabriele Fadda has seen his foodtech startup grow and is expecting to double this year, compared to 2018 with an expected 70% to 100%. He shares that the speed of raising through a platform rather than the VC route was one of the main drivers of choosing this path.
This current Equity Crowd Funding (ECF) round then allows our loyal customers who believe in our business model to buy-in a percentage of SmartBite as we grow bigger in the year to come. Additionally, the speed to raise with crowdfunding is significantly faster than raising from VCs. We have successfully raised approximately US$100,000 as our bridge round via the pitchIN platform and we are looking to raise from private investors in the near future.Gabriele Fadda, SmartBite
Both Gabriele and Therine Goh, COO and Co-Founder of advertising technology startup, AdEasy, also felt the amount they were looking to raise was modest, so equity crowdfunding made more sense.
We were looking to raise a small pre-seed round, and to present our website
for the first time to the public. We felt that crowdfunding was the best option, as it served our funding objectives in terms of the funding amount, and to get feedback/ validation for our website. It was also a great opportunity to gain pitching experience, and to allow our close friends and family the chance to invest in our startup. Unlike our recent pre-series A round, where our fundraising objective was aimed at getting investments from angels (mostly whom are our mentors) who could help us grow within the region. We are planning to raise our next round in year 2020.Therine Goh, AdEasy
We were looking to do a bridge round and some of our loyal customers invited us to do so via a crowdfunding campaign. ECF pushes towards democratising investments as investors would only need a relatively small sum to gain equity in a company you believe in.Gabriele
What challenges can startups face when crowdfunding
Crowdfunding brings its own challenges for startups, which have to be weighed before making a decision on the funding path you should take. With platforms like pitchIN, which is what both SmartBite and AdEasy used, their campaign was one of many, so how does your startup’s campaign stand out?
The main issue with equity crowdfunding is that there are many other campaigns on many other platforms. How do I gain trust and credibility from potential investors and show that the money raised will help make a workable business idea a reality of which they can be a part of.
… We needed (sic) to position and brand SmartBite as a credible and successful business model so that we are able to gain support and thereby source funds from different individuals. Thanks to the PR campaign leading up to the crowdfunding news on SmartBite can easily be found online.Gabriele, SmartBite
Therine, on the other hand, did not feel similar pressure, but did mention that time is necessary to get it right, so that can be a challenge for a busy entrepreneur.
To be honest, our experience with crowdfunding was very good. We did not have any big challenges, as we were very well guided by the crowdfunding platform we were working with. They held several meetings with us to walk us through what we needed to do, advised us on how to structure our pitch deck, and arranged for us to pitch to a few groups of potential investors. If we really had to point out a challenge, it would probably be time. Crowdfunding, as with any other fundraising endeavour, takes time away from running the business. Managing our time efficiently was probably the only (small) challenge we faced.Therine, AdEasy
Issues and complications such as these, were enough of a hindrance to David Wong, CEO and Co-Founder of golf technology startup Deemples, that he actually pulled out of the fundraising efforts even after paying the fee.
First of all, I would like to emphasise that the idea of equity crowdfunding (ECF) itself is not bad. It allows many small investors to come together to participate in something that they normally would not be able to unless they come in with a much larger ticket size. We did first start out wanting to use ECF but we did not as our experience on a particular platform was not the smoothest sailing.
In fact, we fully paid for the ECF service after agreeing on terms but had to pull the plug before going live due to the following major factors (a) The lack of communication from the ECF team, (b) the slow speed they were moving at (I believe that as a start-up we need to be able to be flexible and move fast) and (c) the continuous renegotiations on minimum requirements and fees after it has been agreed upon.David Wong, Deemples
Is it all worth it?
Is the reward or funding worth the hassles for startups? Both Gabriele and Therine believe so, but it is not for every startup.
It depends on the funding objective, and the stage of the startup. In our opinion, crowdfunding works best for early stage startups looking to not only raise funds, but to validate their ideas/products further for market fit.Therine, AdEasy
Yes, I believe that ECF has transformed fundraising ever since the Securities Commission Malaysia issued the ECF framework in 2015. This has provided entrepreneurs, like myself, with an alternative channel to raise funds. However, as mentioned above, there are many ECF platforms and many other campaigns available on it. Fundamentally, you need to ask yourself (a) How am I going to win the trust of my potential investors? and (b) How do I make them have faith in me if I do not have a visible successful track record?Gabriele, SmartBite
Even David is not against the possibility of using crowdfunding later down the line, as he sees benefits to the service.
I don’t have any plans to use ECF in the future but I’m not closed to the idea of using ECF to raise funds as it does help to reduce the number of shareholders on your cap table.David, Deemples
What advice would you give startups exploring equity crowdfunding?
Do your research. Speak to a few crowdfunding platforms, and if possible startups who have crowdfunding experience to determine if it is suitable for what you’re looking to achieve.Therine, AdEasy
Start-up entrepreneurs should do their research to identify what their fundraising objectives are. They need to search for an ECF platform that would suit them best and to prepare a PR campaign properly before starting any crowdfunding campaign. As for any funding campaigns, there is a need for PR work to be done so that companies can showcase and highlight the viability and credibility of their business model.Gabriele, SmartBite
Be firm on fees, minimum requirements and timelines. Any ECF provider that is willing to accept higher minimums with higher success fees are on your side. Most ECF fees are around the 5-7% range but you should definitely negotiate those fees to be higher on the funds that they being in and much lower for those that you close. If they disagree, you know they are not with you since they don’t have your fundraising in their best interest.David, Deemples