I get calls each week from a entrepreneurs across the globe asking for references and insights about equity fundraising through crowdfunding. We’ve got a lot to say on the subject. Bitvore was awarded by Forbes as running one of the top crowdfunding campaigns of all time. The CEO of Crowdfunder.com recently published a nice infographic on The History of Crowdfunding and Bitvore is mentioned as part of the history. To save me doing all the reference calls, here are the top questions I get asked and the answers.
The executive summary: Crowdfunding is great. Do it.
Now for a little detail based on the most popular questions I have been asked by CEOs, VCs, and B-school researchers.
1. What do you mean by equity crowdfunding?
Equity is one of the major variants of crowdfunding. However, the one that gets the most press is exchanging money for a reward or discount on a future product. That is not equity crowdfunding. Equity means you are exchanging ownership in the company for investment.
2. What do I need to start raising money through crowdfunding?
The same thing as raising money from local angels. You need shares of stock, with a price, and you need to be a legal entity. The first thing you should work on is a signed term sheet from a lead investor. Without this, raising investment will be much harder. The term sheet sets the rules of investment for all other investors in the round. It also typically comes from a more sophisticated investor who has lawyers to make sure it’s done properly and who has completed their due diligence. Most investors are followers who participate using the same terms set by the lead investor and count on the due diligence completed by the lead investor. The lead investor and term sheet are a critical prerequisite to success.
3. Which site did you use for crowdfunding?
Several. We started with AngelList and raised money in just a few weeks. After we saw that crowdfunding worked for our business (a B2B SaaS company), we expanded our campaign to Crowdfunder, Fundable and EquityNet in parallel. We had investors participate from all four of the platforms. I will give a special shout out to Crowdfunder and Fundable who went above and beyond to help us. AngelList is the oldest player and probably most famous, as a consequence it’s very noisy with many other companies competing for investors.
4. Should I use traditional angel networks?
Yes, you should use angel networks. Once you have decided that angel investors are the right avenue to fund your company, then angel networks can be very helpful. However, depending where you are located, they may be pretty sparse.
- Angel networks require you to go through screening processes with trial pitches. With crowdfunding you are on your own. Local angels can be very useful for this reason. If you have not pitched your offer at least 20 times, get to it. They put strict time limits on you. Some give you fifteen minutes, some only seven or eight. If you can’t nail your pitch in ten minutes day-in and day-out, then you need to practice more. If you are thinking as you read this that you know your stuff and you don’t need critique, let me just tell you this: Get off your high horse. Practice to real investors. Listen to their questions, adapt your pitch, change your presentation. Drop the points you think are important but that no one understands and add the points everyone asks questions about. Do it over and over and over.
- Local angel networks are free, crowdfunding costs money. First, this isn’t true. Some angel networks charge you money. If you are considering paying your scarce cash to let wealthy people hear your pitch while they socialize then I think that means you have exhausted your other options. The real costs of angel networks are hidden. Angel networks offer little support from the moment you walk out the door. Your reward for pitching is a list of people with a check mark next to who might be interested. That’s it. It’s all up to you to chase these people and try to close them. The angel network does not help you hunt people down. The follow-up process is not free, it’s a huge time commitment! On the other hand, crowdfunding fees are nominal, especially if you consider the reach you receive and zero travel costs or time.
- Angel networks are a good place to connect with potential lead investors.
- One unfortunate part of angel network pitching is the too-common know-it-all in the audience who asks questions that frighten the other investors in the room. Angel networks can have a herd mentality, so one vocal naysayer can end your momentum and put doubt in the minds of their peers. I can’t tell you how many times some genius asked me “What if {fill in name of mega-company here} decides to offer a product to compete with you?” This kind of question has no answer for an early stage startup, it’s a spoiler for all parties. It’s unfortunate the organizers don’t screen these people out or educate their members.
5. Why do you recommend crowdfunding?
Reach, time efficiency, and qualified funnel.
- We have investors from all over the world because of crowdfunding. That’s not possible using angel networks.
- In crowdfunding, it’s all one-on-one relationships. Angel networks are opaque and can suffer from group-think. In crowdfunding, one person says they are interested and then you set up a one-on-one discussion with that person to pitch online. No cars, no planes, no travel time and you get to ask them questions too. In angel networks, you don’t know who is interested until several days after you pitch. Your chance is low for one-on-one relationship building.
- With crowdfunding, I spend an hour online with each investor. I could theoretically brief 8-10 per day with zero wasted time traveling and waiting. One angel pitch will take you at least eight hours of work when you add up screening, coordinating, traveling, pitching and sitting around in a hallway waiting for other entrepreneurs to pitch. Divide that by the number of investors in the room that are interested in your business area. Consider the fact that you got nothing done in running your business the whole time.
- Crowdfunding investors come to me. That’s right – inbound leads. This is sales, don’t confuse the process with anything else. You want to spend time with qualified leads, not looky-loos. Crowdfunding investors raise their hand as being interested before you ever meet. Angel networks are an anonymous group of people in a room. Many, maybe all of them, are uninterested in your business area. The organizers don’t know who will be present or their appetite for what you are pitching.
6. Did you advertise your campaign?
No. Only accredited investors were able to look at our campaign.
7. What crowdfunding site works best?
If you are going fishing, you can only fish in one pond at a time. This isn’t fishing. This is the Internet. Fish in many ponds at once.
8. Will you introduce me to your investors?
No, sorry. We found our investors with hard work. So can you.
9. Do you think crowdfunding will work for my business area?
Bitvore is a B2B software system sold to investment banks and large companies to analyze big chunks of the information on the Internet. We are not a cure for cancer or sexy mobile app. We were very successful raising money through both angel networks and crowdfunding. There is investor appetite for all kinds of solid business ideas out there. Probably yours too.