The Pros and Cons of Equity Crowdfunding for Startup
In the previous article, we have explained how to deliver a pitch deck and gain funding from venture capitals or angel investors. However, it can be difficult to attract sophisticated investors. Thus, crowdfunding can be a great alternative. Crowdfunding is a popular method of gaining funding, especially for newly established startups. According to Startups.com, the total fund raised from crowdfunding worldwide in 2014-2016 is $2.1 billion USD.
There are three types of crowdfunding: reward, donation, and equity. However, in this article, we are going to focus on equity crowdfunding.
What is Equity Crowdfunding?
Equity crowdfunding (ECF) is a process of raising capital by newly established startups or companies that have not yet been listed on the stock market. Back in the day, startups rely on venture capital and angel investors to get early funding. However, equity crowdfunding democratizes and diversifies the investment process to the public at large.
The goal of equity crowdfunding is to gain small contributions from a large pool of investors. With equity crowdfunding, anyone who is deemed qualified by the crowdfunding platforms can invest. The requirements for investors are relatively less strict and vary according to the platform, some of the common requirements are income levels, net worth, and professional certification. Some of the equity crowdfunding platforms in Indonesia that have gained permission from OJK are Santara, Bizhare, and CrowdDana.
The Pros and Cons of Equity Crowdfunding
1. Easy Access to Capital
Usually, early startups seek financing support from angel investors, venture capital, or bank loans. However, those sources of funding are not always accessible for newly established startups. Attracting venture capital is extremely difficult. On the other hand, equity crowdfunding enables early startups from the “crowd” much quicker. Everyone who is not a crazy rich investor can invest.
2. Increase Brand Awareness
Marketing is one of the essential parts of equity crowdfunding. In order to attract public investors, startups need to increase their brand awareness. In this process, startups can tap more potential consumers while trying to acquire capital at the same time. Even when some people are not interested in investing, reaching out to them in the campaign process is already a benefit for a startup. Your investors can also act as brand advocates who talk about your business.
3. Ability to Control
Equity crowdfunding allows startups to set how much equity they want to offer to the public. Since startups don’t need to give up a huge portion of their equity, they have more control to minimize the risk. Since there are no big investors that hold the majority of shares, no investors will hold dominant power in decision making. So startups still have the freedom to navigate their business.
1. Not for All Sectors
Equity Crowdfunding highly depends on customer bases. The more consumer base you have, the better. This is why startups with B2C (business-to-consumer) marketplace models tend to perform better. On the other hand, the sectors that are not consumer-focused tend to be more challenging. This is because non-B2C sectors have less exposure to the public which means there are fewer people to reach and there is a lack of awareness of the products and services that they offer.
2. High Costs
Gaining investors in this crowdfunding method takes a long time. Startups need to set their campaign for a long time to increase their brand awareness. Not only is it time consuming, but it also costs some money. Running the campaign has some upfront costs. However, as mentioned before, aside from getting funding, this campaign can also be beneficial for your brand awareness.
Need Help Getting Funding for your Startup? Join Gear Up!
We are here to help you navigate the never-ending challenges of building a startup. Gear Up is a startup brainstorming partner in Indonesia that provides one-on-one and catered support for the chosen startups in our network. We can help you find the correct business model, gain funding for your startup from venture capital, and scale up your startup. Join us to begin your startup journey.