Pros and Cons of Equity Crowdfunding and how IE startups used them

By: Sharjeel Sohaib

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Aug 20, 2021

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Equity Crowdfunding

It is hard for startup founders to raise money through conventional methods because not every startup can demonstrate hyper growth like Snapchat or Instagram. That’s where ‘equity crowdfunding’ (or ECF) provides a better alternative as a startup funding method. 

Equity crowdfunding (CF) is a fundraising method startups, and private businesses use to raise capital from the crowd (aka investors), either accredited or not. The idea is to bypass the traditional and more rigid sources of startup fundraising like VC firms, private equity (PE) firms, and institutional investors. 

Equity CF can be of two types, i.e., Regulation Crowdfunding and Regulation A+.

For Regulation Crowdfunding offerings, you can raise up to $5M annually, and you can launch a campaign within 30 days. For Regulation A+, you can raise up to $75M annually, but your offering has to be qualified by the SEC (a process which can take around 6 months)”.

StartEngine

Equity Crowdfunded Startups from the Inland Empire 

Three startups from the Inland Empire recently raised capital on equity crowdfunding (CF) platforms. These include Blue and Back Porch Homes, which both raised funds on an equity crowdfunding platform called Republic.

Another IE startup, GLOW Beverages, got crowdfunded via a popular equity CF platform StartEngine.  

Blue

Blue raised $1M from 3900+ investors for its social networking app that lets people share their digital social and business cards using the Blue mobile app. 

Back Porch Homes

Back Porch Homes, on the other hand, only raised $158k using Republic for its Tiny Homes on Wheels (THOWs) startup. 

GLOW Beverages

GLOW Beverages barely raised $100k from 122 private investors via StartEngine.  

WeFunder, another popular equity crowdfunding platform, hosted the fundraising campaigns of Food Nome and Pharm Robotics, both of which are headquartered outside the Inland Empire. 

Pros of Equity CF

  • Provides access to capital without ceding control of the business
  • Investors become brand ambassadors, and mission-oriented investors are likelier to become activists. Compared to VCs, they actively spread word of mouth for the startups they invest in.  
  • Entrepreneurs have the freedom to choose securities/company shares they want to offer to investors and on what terms.

Cons of Equity CF 

  • Equity crowdfunding is said to be a ‘high-risk’ and ‘low-liquidity’ investment opportunity for investors. 
  • The failure rate of equity CF campaigns is 50%, meaning that only half of the crowdfunding campaigns successfully raise their targeted amount. 
  • Equity CF does not fund large capital requirements for a fast-growth startup. However, there are exceptions like Oculus Rift (crowdfunded $2.4M, ten times the amount it originally sought). Other examples include Cruise automation. However, the driverless car technology startup made a billion-dollar exit thanks to its automotive giant GM Motors acquisition.  

Further Research & list of Equity Crowdfunding Sites

Before the advent of ECF platforms, the only chance for the general public interested in investing small sums of money (aka non-accredited investors) was to wait for a startup to announce its IPO (Initial Public Offering). But this also meant that VCs and angel investors had already made considerable financial gains by being the early investors. 

Equity Crowdfunding provides an alternative method for startups to raise capital and allow the general public to participate in the funding cycles. But, democratizing startup funding through ECF platforms does not mean that the space is not regulated. The SEC (Securities and Exchange Commission) calls an ECF platform a ‘crowdfunding intermediary’ or a funding portal and regulates them under the applicable laws. 

Some of the famous ECF platforms are:

Below you will find a detailed list of funding portals regulated by the SEC and members of FINRA (The Financial Industry Regulatory Authority).  

Author

  • Avatar Of Sharjeel

    Sharjeel joined Startempire Wire as emerging technologies editor. Earlier, he worked at Silicon Canals, a leading English language technology media source for the Benelux and wider Europe. He covered the European technology and startup ecosystem digging into latest funding rounds of startups.

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