Why raise pre-seed funding through Equity Crowdfunding?

Why raise pre-seed funding through Equity Crowdfunding? 

By: Abu Dhabi SME Hub
Fundraising

We’ve already seen that there are 4 different types of crowdfunding that you can consider 

Among those, equity crowdfunding has been gaining prominence over the past few years.

But is it right for your company, and why should you consider it? 

Equity crowdfunding allows you to raise funds from individual investors in exchange for shares in your company. It may be less suitable for creative or hardware, product-focused types of projects. But it can prove of great value to companies seeking funding to further build more complex service offerings – Whether an application, a food business or even technology moonshots like… flying cars!  

 

Equity crowdfunding could be right for you, if… 

… you’re evolving in an industry that is not necessarily ripe yet, and where local investors are hesitant to back you, without clear traction. Validation from individual backers sets you up for success in future rounds of funding. Not only does it allow you to extend your company’s runway, but it also offers valuable proof-of-concept. We’ve explored best practices for reward-based crowdfunding campaigns. There are however some notable differences to take into account, with equity crowdfunding. 

 

First, find a lead investor 

Small investors may be reluctant to come into a project that doesn’t yet have backing. A committed investor sends a positive signal that accelerates the fundraising process.  Secure a lead that can commit to investing at least 20-30% of the total required amount  
 

Secondly, focus on building a network of potential investors  

Target industry professionals with a clout, who can support the campaign and the company as ambassadors, now and in the future. Reach out widely and to build a strong network months ahead of the campaign. Whereas reward-based campaigns can rely a lot more on emotion, in this case, it’s essential to emphasize the business aspect. Share metrics, make the case for growth and the opportunity investing in your company represents. 

 

Third, set clear and achievable milestones  

There are two different targets to think about: Your main target is the overall amount you are looking to raise. It should provide your business with about 6 months of runway. Your minimum target is the lowest amount that you can tap into, as you continue running the campaign. Be realistic with both and make sure to provide detailed explanations on what you’ll do with the funding. 

 

Next, provide supporting financial documentation  

A company raising funds on an equity crowdfunding platform is required to provide more or less elaborate financial documentation. Depending how much you are raising, you may be asked for CPA-reviewed statements. Do study and prepare the required documents, ahead of setting up the campaign on the platform. 

 

Finally, structure the funding round & plan for your legal obligations  

On platforms like We funder, convertible notes are commonly used to structure the funding round. To avoid having too many stockholders on the cap table, a special-purpose vehicle or SPV is set up, where investors pool in their capital to invest as 1 entity, generally represented by the lead investor. Based on the amount you are raising, agree on a valuation and the equity you are willing to give up to your incoming investors. You will then have serious legal obligations, including annual general meetings with shareholders, annual reports, and decision procedures.  

 

If you’re watching this, you’re probably already thinking about getting started on crowdfunding.

Make sure to explore the rest of our series to understand best practices when it comes to preparing your campaign…and happy crowdfunding! 

 

 Sources: 

AD SME Hub Interview with Mohamed Zaid Founder and CEO of Fanera 

Wefunder: “INVEST IN FANERA The New Era for Football Fans” https://wefunder.com/fanera  

Wefunder: "TERRAFUGIA Flying cars. Seriously" https://wefunder.com/terrafugia/ask  

Wefunder: Getting Started https://help.wefunder.com/#/investor/getting-started-for-investors 

Wefunder: "How do SPVs work?" https://help.wefunder.com/spvs-custodians/how-do-spvs-work-investor  

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