How to prepare your business for equity crowdfunding
John Auckland is a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £4 million for over 20 companies on platforms such as Crowdcube, Seedrs, Indiegogo and Kickstarter.
TribeFirst is the world’s first dedicated marketing communications agency to support equity crowdfunding campaigns and the first in the UK to provide PR and Marketing campaigns on a mainly risk/reward basis.
Auckland outlines his views on how to prepare yourself for equity crowdfunding.
Benjamin Franklin once said: “By failing to prepare you are preparing to fail.” This statement can relate to many things in life, but it’s particularly poignant in relation to the minefield that is equity crowdfunding.
A review of the historic data on Crowdfunding data platform, Tab, reveals that there were 1,158 completed equity crowdfunding campaigns in the UK in the last two years, of which 624 were funded and 534 were unsuccessful – a success rate of 54%.
I chose the last two years, because this is the time period in which I believe the crowdfunding industry has matured and become considered mainstream, leading to a whole host of value added service providers springing up. So despite all the resources campaigners have available to them, still nearly half of campaigns are failing.
Every single campaign was subject to the same stringent due diligence the platforms are required to complete, so what did the successful campaigners do differently? I personally believe it’s down to a lack of preparation.
In this article I’ll explain how you can prepare your business for a successful campaign. In particular, I’ll explore the biggest thing founders get wrong – choosing the right time to raise in order to maximise the opportunity.
Getting the timing right
I would argue that the biggest factor that affects the success or failure of a crowdfunding campaign is timing. Launch too soon and you’ll be underprepared or overvalued. Go too late and you’ll miss out on tax benefits for your investors. And getting your timing wrong could mean you don’t have the right resources in place.
The most important element to correctly timing your campaign is capacity. When can you truly dedicate the time and resources you need for a successful campaign? Can you afford to bring in the expert service providers who have supported many successful campaigns? Do you have enough time every day to respond to the investor questions that will come through, and meet with investors face-to-face?
Another consideration is your valuation, which ideally is pegged to your trading history or profitability. Launch your campaign too early and you’ll have to give too much of your business away.
You’ll want to build-up some value in your company before you run your campaign. Finally, under no circumstances should you crowdfund when you’re about to run out of money. Ideally, you’ll have a good few months of runway to give you plenty of time to run your campaign to your pace. Better still, you’ll have enough cash reserves that you don’t really need the investment for working capital at all.
It’s a common criticism of equity crowdfunding that valuations are wildly ambitious. I disagree with this view, because the open nature of crowdfunding allows the market to dictate whether the valuation is deemed fair.
Of course, lots of campaigners do push for a high valuation, and that’s probably contributing to the high failure rate of equity crowdfunding. So getting the valuation right is one of the most important things for a founder to do during the preparation phase of the campaign.
To reiterate, timing is important here, because most founders don’t want to be poorly incentivised by a low equity stake (and most investors don’t want them to be either). So it’s incredibly important that you can justify the valuation you arrive at.
My biggest advice here is to find a good accountant with experience in valuing early stage companies. Ideally they will provide you with a headline statement about your valuation methodology, so that when you’re asked how you arrived at it, you have a solid answer.
Apply for SEIS/EIS
SEIS and EIS are two incredibly generous tax relief schemes that allow investors to de-risk their investment into early stage companies. It’s been the driving force behind the unprecedented success of UK crowdfunding, providing up to 80% protection against an investor’s investment into a start-up.
Sit your campaign alongside many other companies on the platform that have EIS or SEIS eligibility and, for the majority of crowd investors, yours will look significantly less attractive as an investment opportunity. So, if you’re a UK company or have part of the management function in the UK, apply today.
Build a solid team
You won’t be running this campaign single-handedly. There’s a pitch video to create, pitch copy to write, graphics to design, social media to stay on top of, investors to meet, questions to answer… Assemble your a-team to tackle your campaign – you’re going to need them. And make sure they’re up for the fight and incentivised to see the campaign succeed.
Prime the pump
Ideally you’ll have around 30% of your initial target lined-up before launch, with a high likelihood of another 30-60% in the pipeline. Most people think the majority of their investment will come from the equity crowdfunding platform. In fact, for most campaigns, the entrepreneurs and other stakeholders will find the vast majority of investment through their own networks.
Finding private or lead investors isn’t that difficult. Sign-up to a number of pitch events, such as Paradigm Talks, connect with angel investors on LinkedIn, and use sites like the UKBAA or Angel Investment Network.
If you don’t get any bites from doing this kind of activity, then it’s potentially a sign that there’s something wrong with your pitch or proposition.
I highly recommend you plan out every day of your campaign in advance. It’s a bit like running a marathon – your campaign is never going to go exactly to plan, but having one in the first place will prepare you for when the unexpected happens.
We prefer to use Trello, essentially a digital pinboard for ideas. We can assign specific tasks to individuals, and get a clear overview of all the things that we need to do each and every day.
You might decide to have a separate content planner, so you know what communications you’re sending out every day across social media, email and all other channels. In fact, the crowdfunding platforms like to see this in advance of your launching your campaign, so it’s not a bad addition if you can’t make this work directly on Trello (or Excel, or any project management software you might decide to use).
You’ll also have a pitch video to film and a due diligence process to go through, both of which can take a lot of time. So make sure you leave enough time in the production process for both of these. They’re commonly the areas that hold campaigns up from launching.
Know your numbers
We’ve all seen those episodes of Dragon’s Den where the entrepreneur completely forgets their numbers. Don’t be that person. Know the highlights of your numbers, both past and forecasted for the next three years minimum, and be clear about what assumptions you made to build the financial model.
Ideally, you will know what kind of returns an investor is likely to achieve if you managed to hit the numbers in your forecast. Again, a good accountant is essential.
Hopefully this has provided some useful pointers for preparing for your campaign. More importantly than any of this – have fun and don’t ever give up hope. Investors are investing in you more than your idea, so why should they believe in you if you don’t believe in yourself?