7 Ways Equity Crowdfunding is Revolutionising Fundraising for Startups in 2021

August 31, 2021

Image credit: Lovefreund

7 Ways Equity Crowdfunding is Revolutionizing Fundraising for Startups in 2021

Here’s something pretty obvious: capital is crucial for startups. Perhaps something less obvious is exactly how your company should raise the capital.

Traditionally, when new businesses set out to source startup funds, you would do one of a few things: invest personal savings, raise funds from family and friends, or head to the bank and take out an institutional loan. If you were lucky enough, a business angel may be interested, in exchange for a large chunk of your company in return.

In 2021, things are different. Of course, these traditional options still exist, but so too does equity crowdfunding.

Equity crowdfunding is currently revolutionizing the fundraising process for startups, with $2.5 billion raised in equity crowdfunding, according to Fundly.

Differing from rewards-based crowdfunding, equity crowdfunding is a means for early-stage private companies to raise money from a large group of everyday people – in other words, the crowd. In return, these unaccredited investors are offered a small share in that company. If the company does well, they can profit; although they can equally lose what they invested if the company doesn’t succeed.

Equity crowdfunding is often arranged through platforms such as Wefunder, StartEngine, and Republic, which are all generating huge amounts for startups. In fact, in the United States, $214.9 million was raised by 1,035 new companies in 2020, with Crowdwise predicting that equity crowdfunding will surpass $300 million in 2021.

How is Equity Crowdfunding Revolutionizing Fundraising for Startups?

Now we know what equity crowdfunding is, we can ask how exactly it is changing the game for startups and why it could be the right call for your company.

#1 – It opens the door to a broader audience of investors

With equity crowdfunding, your success isn’t reliant on just a handful of people who may or may not believe in your vision. Instead of having to convince an angel or a bank manager, you passively pitch to millions of potential investors. In fact, Wefunder alone has accrued investments from 1.39 million investors in the nine years since 2012.

This opens the door to more people, who all have an active interest in investing in companies like yours. This gives your company and objectives a greater chance of resonating with the right people and raising the capital you require.

#2 – It can be an incredible catalyst for business

By raising money through equity crowdfunding, you are also doing great things for your bottom line. Crowdfunding rounds are becoming key parts of marketing strategies, and are a powerful way for businesses to engage with customers, deepen customer relationships, and increase loyalty.

It makes sense. If an individual invests in your company, they will want it to succeed to see a return on their investment. This means that they are more likely to purchase from your company, refer your products and services, and share your story to others.

#3 – It allows for both launching and scaling

Equity crowdfunding may well be ideal for businesses who need capital to get off the ground, but it can also be used by more established startups as a fundraising method when the time comes to scale.

Changes to the Jumpstart Our Business Startups (JOBS) Act late last year saw the amount of money that can be raised through equity crowdfunding jump from $1 million to $5 million. This means that companies can now generate a considerable amount of capital, wherever they are on their journey of growth.

#4 – It allows you to dictate the terms…

One of the biggest draws to equity crowdfunding is that you as the entrepreneur have full control over the terms of investment, including your objectives, your company valuation, and how much capital you wish to raise.

Meanwhile, alongside the maximum fundraising target, this style of crowdfunding allows you to establish a minimum funding goal. So, even if you don’t achieve everything you want, you can still successfully raise capital.

#5 – …and it allows you to retain control

After dictating the terms of the fundraising, another draw to equity crowdfunding is that you will remain in control of your company.

This means that instead of having a business angel come in and take a large and potentially majority share of the company, you are assembling a larger group of investors making smaller contributions – 78% of investments are under $500, according to Wefunder. This means that nobody apart from you is going to end up with the majority of power.

#6 – It allows you to focus on doing what you do best

By using an equity crowdfunding platform, you are promoting your business to a ready-made audience who are out to actively invest in startups like yours.

This convenience allows you to spend more time building your business, instead of figuring out how to pitch to your bank, business angels, or reluctant family members.

The plus side of this is that it requires no need for public speaking or presentations – great news for introverted entrepreneurs, who are able to simply create a business plan, upload it to the crowdfunding platform, set a desired financial goal, and then allow the people to decide if investing in the company is for them.

#7 – It provides a means to validate your plan and make important changes

Market research is key to startups and equity crowdfunding is a new market research tool. By putting your business out to the masses early on, it offers a way to gain important feedback on your vision, product, and business plan.

After all, gathering an army of keen crowdsourced investors will be validation that your vision resonates with the right people. If you eventually do need to rely on the financial might of a business angel, this validation will be a useful thing to have.

Equally, if things aren’t going your way and your campaign is less successful than you had imagined, this feedback can be very helpful, allowing you to make adjustments to your business plan or product offering to improve your odds of success.