More than 58,000 projects have successfully fundraised on Kickstarter since it launched in 2009. Not all of those projects turn into successful businesses post-Kickstarter, but many of them do and often a couple years in, they realize they need to raise more funding. At that point, some return to Kickstarter, while others go the venture-capital route. Most founders would do well to consider accredited investor crowdfunding in that mix as well, but in some cases are frightened by either the formality of the phrase “accredited investor” or the informality of the word “crowdfunding.” Others simply don’t understand how accredited investor crowdfunding compares to other types of crowdfunding or venture capital, and whether their business is a strong fit for this style of fundraising.
With that in mind, following is a simple guide to determining whether accredited investor crowdfunding might be right for your company and, if so, how to go about doing it.
Is Accredited Investor Crowdfunding a Good Option for My Company?
Accredited investor crowdfunding isn’t a good fit for every business but, for companies at a particular point in their growth, it can work well. It may be a good option for your company if:
You need to raise substantial funds. You are looking to raise in the hundreds of thousands to a few million dollars.
You are looking for more than just capital. Equity tends to create incentives. Bringing in investors with relevant backgrounds may add value to your business far beyond just capital. Many investors can be, and have more incentive to become, brand ambassadors, to provide advice informally or formally, to make connections, and more.
The equity story is more compelling than pre-orders for your product. Not all companies or products are a good fit for a donation-based platform. For example, Klymit, an outdoor apparel company, has a compelling story for equity investors, but might find it difficult to convince individuals to donate money in exchange for future product as those individuals can just as easily find access to the full line of apparel through Klymit’s website.
You have reached a certain level of scale or profitability. At some point, it becomes difficult to convince individuals that a small product pre-order through Kickstarter makes financial sense.
Your local network of investors is not as vast or relevant as you would like. Assuming the platform of choice has the right network for your company (based on your industry, etc.), you may reach a broader group of investors and can increase your focus on relevance as opposed to location.
I’ve Already Raised on Kickstarter, What Do I Do Now?
Accredited investor crowdfunding platforms can be a good next step for businesses that have raised successfully on Kickstarter and are looking for their next infusion of cash. Here’s why you might want to consider a crowdfunding-for-equity platform if you’ve successfully raised on Kickstarter:
You already have experience communicating your story. You’ve already successfully engaged investors through an online platform. You can leverage that experience in communicating with investors again.
You have reached greater than $500K in annual sales. Your company is beyond proof of concept, and you’re looking to raise a larger amount of capital to take the business through the next stage of growth.
You would like new advisors. You are interested in bringing in some sophisticated, value-add partners to the table in exchange for equity in your business.
You want to generate some buzz around your company while bringing in new investors. We have seen some great PR stories for companies that are raising capital through online platforms. These provide companies great exposure and help build brand awareness. Some examples of press include articles in Fast Company and The Wall Street Journal.
I Think Accredited Investor Crowdfunding Is Right For Me, But How Do I Do It?
You’ll need to pull together a few more solid financial documentation and business plans than would be required of you on Kickstarter. Here’s what you should prepare if you’re thinking about applying to an accredited investor crowdfunding platform:
Know the Details of Your Business. Be prepared to speak intelligently about all aspects of your business including the addressable market, financial results, growth prospects, potential acquirers, etc.
Historical financials. You’ll need financials from typically the last 2 years or, for younger companies, since inception. It may not be required that these financials be audited or reviewed.
Projected financials. Investors want to understand where the business is headed over the next few years and where the opportunities for growth lie.
Planned uses of capital. The amount you are looking to raise and the respective uses for it (e.g. inventory purchases, marketing, team hires, etc.).
Valuation expectations. Expectations here should be in-line with the market for companies in the same sector and of similar size, growth, margin structure, etc.
Transaction documents. Ahead of the actual raise (not necessarily ahead of applying), companies will need their transaction documents whether it is just a Term Sheet to solicit commitments or full documentation (Stock Purchase Agreement or Convertible Note Agreement depending on the desired structure of the offering, as well as the company’s Operating Agreement or Investor Rights Agreement). At CircleUp, we offer standard templates companies can use to start this process. Of course, these documents need to be tailored to your individual offering and product.
A good attorney. Finally, you’ll want to consult an attorney with private placement experience.
Hopefully this information has helped you determine if now is a good time for your company to apply to an accredited investor crowdfunding site or if this might be an option you’ll pursue in the future. Either way, we celebrate small business successes and wish your business the best.
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