- By SeedInvest
- March 30, 2022
- 8 minute read
Equity crowdfunding first became available to U.S.-based non-accredited investors in 2016 when Title III of the JOBS Act took effect, legalizing Regulation Crowdfunding and unlocking a new world of possibilities for startup investors and founders.
This gave rise to both marketplaces and curated platforms like SeedInvest, where founders of high-growth startups can access a robust network of hundreds of thousands of everyday investors, many of whom bring both capital and connections or subject matter expertise.
Equity crowdfunding has dramatically widened the pool of investors available to founders, allowing retail investors to back early-stage startups and get a chance to reap the rewards of an exit or public listing, opportunities that until just a few years ago were reserved exclusively for wealthy, deep-pocketed corporate VC firms, or other accredited investors. Startup investing is inherently risky, and most companies don’t stand the test of time, but equity crowdfunding gives retail investors a seat at the table they never had before.
Since Title III was enacted, equity crowdfunding has grown exponentially. According to KingsCrowd, equity crowdfunding campaigns raised a total of almost $75 million in 2018, increasing to $100 million in 2019. Even with the onset of the COVID-19 pandemic in 2020, equity crowdfunding had another record year, raising $211 million.
For 2021 that total more than doubled again, growing to more than $500 million.
Yet despite this tremendous growth, and the accompanying surge in awareness within the startup community, some current and potential market participants still have some fundamental misunderstandings about what equity crowdfunding is, what it isn’t, and what it’s all about. This post will attempt to dispel 10 of the biggest myths about equity crowdfunding.
1. Traditional VC’s don’t like equity crowdfunding.
Some founders have an outdated perception that they must choose between venture capital and equity crowdfunding, but the market has evolved over the last 3-5 years and VCs have too. Daniel Fetner of Alpaca VC writes:
“Not only have founders become much more comfortable seeking capital from crowdfunding platforms, but professional investors (VCs) have also come to realize the value and that it’s a unique offering that they cannot replicate themselves.”
A successful equity crowdfunding campaign attracting thousands of investors not only gives your company the funding it needs to execute on plans for growth, it serves as evidence of interest on a mass scale, strengthening the negotiating position for founders who decide to raise additional funds through a venture capital deal down the line.
After raising on SeedInvest, Metadata.io, raised a $40 million Series B funding round led by Next47 and Resolute Ventures. Meanwhile Virtuix counts Mark Cuban as an investor and Heliogen was backed by Bill Gates before going public.
2. Equity crowdfunding is only for small rounds.
This misconception is a popular one, and one of the easiest to debunk. Many founders think equity crowdfunding is meant for companies only looking to raise a few hundred thousand dollars at most. In fact, in 2020 the average raise on SeedInvest was $3.3 million, with many companies – NowRx, Virtuix, and Death & Co to name a few – raising considerably more. Startups on SeedInvest raised more than $80 million in 2020, and more than $440 million has been invested through the platform as of February 2022.
SeedInvest generally works with companies raising above $500,000 and the Regulation CF exemption allows startups to raise from any investors they choose to a funding cap of up to $5 million over a 12-month period. Regulation A+ allows startups to raise up to $75 million.
3. Equity crowdfunding is only for early-stage companies.
Online fundraising can be a successful fundraising route for companies of all sizes, even ones that have previously raised funding through angel investors or VC funds. SeedInvest has worked alongside startups of every size, raising funds from seed rounds to 8-figure Series B rounds and beyond, totaling hundreds of millions in capital raised.
An investor community more than 600,000 strong has been identified by hundreds of successful SeedInvest founders as a distinct value-add component of the platform. This diverse pool of capital to draw upon increases the odds of startups achieving their fundraising goals, while also exposing the business model to more potential “superfans” that will spend their own time and effort promoting a startup that gets them excited.
4. Equity crowdfunding is only for consumer-focused companies.
When considering equity crowdfunding, many founders believe it’s only viable for certain industries like electronics, e-commerce, or consumer packaged goods (CPG). In reality, SeedInvest is industry-agnostic, facilitating raises for a diverse assortment of companies including SaaS, healthtech, cleantech, retail, clean energy, IoT, transportation, gaming, and many more.
SeedInvest has a wide variety of potential supporters, ranging from angel investors, family office funds, venture capital funds and many retail investors. This diverse investor base enables SeedInvest to work with nearly any type of company. In fact, many of the SeedInvest portfolio’s most successful capital raises have come from complex industries, including Heliogen (listing on the NYSE), metadata.io (repeat issuer), and BetterDoctor (acquired).
5. Raising an equity crowdfunding round will mess up your cap table.
Some founders are concerned that having lots of small shareholders will make it impossible to maintain a clean cap table. In fact, SeedInvest capital raises are structured with the founding team in mind, consolidating many of the smaller individual investors together under a single line item to make it easy to manage retail investors throughout the life of the business. The SeedInvest platform also makes it easy to manage shareholder reporting and communications throughout the course of your initial raise and subsequent funding cycles.
6. Companies can’t raise from VCs or angels during their crowd round.
There is no prohibition in U.S. securities law against combining equity crowdfunding with any other type of funding, from angel investments to VC deals or friends-and-family rounds. SeedInvest platform companies have attracted the attention of big-name VCs who went on to offer funding at a future date; equity crowdfunding can be a force multiplier when it comes to proving traction.
Many companies choose equity crowdfunding to fill an allocation as part of a larger venture round, for instance, a $1 million portion of a total $5 million round can be raised through a community raise on SeedInvest. This allows companies to activate and engage with their community while simultaneously working with VCs to fill out their “mixed” round of funding.
7. Equity crowdfunding is too complicated.
The litany of rules, regulations, and exemptions governing equity crowdfunding can seem daunting. But companies featured on the SeedInvest platform gain access to an experienced, knowledgeable partner to guide you through all stages of the journey and who will understand the unique circumstances of your raise. We helped create the rules of equity crowdfunding and we’re an industry leader in helping founders execute successful fundraises while navigating complexities including due diligence, operational structuring, compliance and much more.
8. Equity crowdfunding is too expensive.
Raising an equity crowdfunding round is surprisingly affordable, and in some cases can eliminate many struggles over valuation and board seats founders commonly contend with when negotiating a venture capital deal. SeedInvest’s Help Center and FAQs page is a good place to get an idea of the total potential cost, but in a base case, businesses pay a placement fee of 7.5% of the amount you raise on Seedinvest, plus an equity fee of 5%. Founders pay nothing unless your raise is successful, and up to $3,000 of any associated accounting fees will be reimbursed upon the launch of your campaign.
Compared to the 20-50% that many angel investors or VCs demand in exchange for their backing, equity crowdfunding can get you the funds you need while maintaining greater ownership over your business.
9. An equity crowdfunding campaign takes too long to get up and running.
Startup founders want to focus on growing the business, often making them hesitant to take on additional responsibilities that could divert their attention. Fortunately, SeedInvest offers a turnkey solution that can begin marketing a crowdfund in weeks, and a closed successful round of funding raised in just a few months.
10. Retail investors don’t bring value beyond money.
As we’ve seen time and time again with successful raises on SeedInvest, an investor community is a force to be reckoned with when it comes to raising capital, and the value they can bring often goes beyond their monetary contributions.
There’s a misperception out there about “smart money” vs. “dumb money” — and that retail investors aren’t as savvy as those at the corporate level. But that ignores the fact that professional investors make terrible bets on a regular basis (think epic belly-flops or outright frauds like Juicero or Theranos that garnered hundreds of millions in so-called “smart” money before collapsing).
The truth is, today’s retail investor is a very different animal than in years past. They bring their own knowledge and experience to bear, do their research, and judiciously weigh their individual risk tolerances before putting capital in play.
Activating an army of retail investors can pay off in any number of ways, since you’re also plugging in to each of their professional networks. This exponentially increases the chances you’ll get that next key introduction or meet your next brand advocates who will help amplify your marketing efforts and shout out your company’s greatness from the rooftops.
A community round with SeedInvest instantly puts your business in front of hundreds of thousands of new potential connections with resources that are just waiting to be tapped into.
How to Get Started
Equity crowdfunding has been propelled into the future now that companies that have raised rounds are going public, receiving large investments, and expanding into new markets.
Hopefully this primer busting some of the most persistent myths about equity crowdfunding has given you a better idea of what the fundraising method is all about. If you’re looking to take an even deeper dive, check out our Ultimate Guide to Equity Crowdfunding, which outlines how it works, how much you can raise, regulations, and how to get started.
