By Scott Kitun, CEO of Technori
While buying equity in startups used to be reserved for accredited investors, new vehicles have opened the door for anyone to take a financial stake in a young company. Equity crowdfunding allows founders to raise funds to build an MVP, gain valuable customer feedback and take a real shot at entrepreneurship.
These new equity opportunities give investors of all wealth levels a chance to participate in the investment rounds of early-stage companies. For aspiring entrepreneurs, equity investing is a low-barrier way to learn more about business as a small stakeholder.
As a founder, I believe that lifting up my fellow entrepreneurs is an essential part of the job. I want to help my peers, and if a few grand from me can spark their campaigns to life, I will happily pay forward the help that I once received.
Of course, investment is a two-way street. First-time founders should invest in their peers not only to feel good about themselves but also to establish connections with other investors and learn their pain points. When founders help one another, they also help themselves.
Crowdfunding for More Than Just Funds
Equity crowdfunding delivers more than early seed money and idea testing. Entrepreneurs who receive funds this way gain access to a savvy, invested audience of people eager to provide helpful feedback. If I were to start my business today, I would not take on $65,000 in credit-card debt or ask my parents to cosign loans. Instead, I would list on a crowdfunding platform, share my vision with my inner circle and spread the word.
VCs and angels all want to know what customers think about the business and how much the company can grow. With equity crowdfunding, founders can point to hard numbers to answer those questions. Forecasting data pales in comparison to being able to point to $450,000 raised from 600 people, along with all the user data that initial base provides.
Equity crowdfunding does not preclude entrepreneurs from taking advantage of other funding opportunities. On the contrary, gaining access to crowdfunded capital provides leverage for founders to wait for the right partnerships down the line when accredited investors come along to help push the company toward Series A and beyond.
Why Entrepreneurs Should Invest
Startups stand to gain plenty from equity crowdfunding, but why should founders of young companies, already running lean, carve out part of their budget to invest in their fellow entrepreneurs? Consider the following reasons to participate in equity crowdfunding of other businesses:
- You might strike gold. Oculus raised money on Kickstarter when it first came out. Had it turned to equity crowdfunding, the 9,000 early backers would have received nearly $30,000 in addition to their first-generation headsets when it was sold to Facebook for $2.4 billion. Not a bad turnaround for an investment of a few hundred dollars.
- You learn what investors want from you. Nothing teaches a founder how to see things from the investor's perspective like switching sides. By making a financial commitment to another company's success, you start to ask questions you may not have considered about your own business.
- You gain insight into the intricacies of funding. Most entrepreneurs want funds for their companies, but few understand all the ins and outs of funding rounds. By necessity, investors learn the terms and stages of private company funding as their investments grow.
- You gain credit in the startup community. What better way to make positive connections with other startups than by investing in them? Even if the investments are small, a gesture of confidence in another company can deliver big gains down the road if that company makes it big. When startups sputter out, the connections gained from investing in them are still worth the price of admission.
Eventually, I plan to be wealthy enough to make heavy investments in my fellow founders. I may not be liquid enough yet to cut big checks, but that doesn't stop me from taking advantage of current opportunities. By using equity crowdfunding to invest small stakes in young companies, I gain a foothold to reinvest later when I do have the liquidity.
Ready to Plant a Financial Flag?
Not everyone is ready to join equity crowdfunding from the start. Before investing, ask yourself if you can afford to lose your investment. If the answer is no, wait until you have spare cash you don't need to see again. Likewise, if you're a founder looking to raise money via equity crowdfunding, hold off until you have at least $5,000 to $10,000 to file the proper forms and market your campaign.
If you have the money and want to enjoy these perks, however, then get out there and see which companies deserve your funding. Learn to think like an investor, not just a founder, and see what it's like on the other side of the table.
Scott Kitun is a Chicago-based media entrepreneur, Technori CEO and host of The Startup Showcase on WGN Radio.