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I am no stranger to raising capital for both private and public companies. I’ve raised over $200 million in capital for my companies, and had over $2 billion in exits. I’ve taken a company public and drove it to a $1 billion valuation. In fact, I even wrote a book about raising venture capital: PLAN COMMIT WIN — 90 Days to Creating a Fundable Startup.
I think the underlying principles in my book still apply, but what we have seen over the last 10 years is that venture capital has move progressively downstream. What do I mean by that? Many VC funds that I would have considered as potential early stage investors (seed stage and Series A) have moved downstream to growth stage (Series B, C, etc.). What does this mean for entrepreneurs, company founders and startup CEOs? Well, it has created a ‘funding gap’ for companies seeking seed investors. This gap has been partially filled by Angel investors and family offices, and if you’re fortunate to be a superstar in Silicon Valley with a network that includes so-called super-Angels, then they can be terrific investors as well.
Raising Seed Capital
For my current company, GroGuru, our sole source of capital has been from me and my co-founders, other Angel investors, Angel groups, family offices and some seed stage accelerator programs in our vertical market, agriculture technology, also known as AgTech. We have also participated in number of contests for investment, some specific challenges in the AgTech space, and others, like the San Diego Angel Conference (SDAC).
The process is akin to the ‘Jerry Lewis Telethon’ where you are ‘smiling and dialing for dollars’ over an extended period of time, typically for check sizes of $25,000. You need to have an extensive network and know how to ‘mine’, like mining for gold, that network for investor leads.
GroGuru has been able to raise over $3.8 million over four years using this process. It has been inefficient, frustrating, and, at times, exhausting. But this is a critical part of the startup CEO job: keeping ‘gas in the gas tank’ to fuel the growth of the business.
How a Pandemic Can Change Your Plans
In early 2020, as the Covid19 pandemic hit, GroGuru, like many other companies, was caught flat-footed. We were fortunate to be experiencing revenue growth and had established product-market fit for our product. We were in discussion with a number of VCs about leading our Series A financing round. And we were also participating, for the second year in a row, in the SDAC.
When the pandemic hit, venture capital investing almost completely halted. VC funds went into triage mode deciding which of their existing portfolio companies they would kill, try to sell, and continue to fund. And if they decided to continue to fund, how much they would need, with a goal of giving their best companies 12–24 month of cash runway to survive what was expected to be a protracted recession. The jury is still out on that.
Some companies did get funded, and late stage companies that are showing great promise, or that are in certain hot sectors expected to benefit from the pandemic are getting funded. GroGuru was not in that group. However, we were fortunate to secure federal government PPP money, a little over $200,000 to give us time to explore alternative financing strategies.
Although we didn’t get funding from the SDAC in 2020 (we did get over $100k in funding from them in 2019), we did win the ‘People’s Choice Award’ at the conference. Which, of course, was held as a virtual event.
History of Equity Crowdfunding
Rewind to April 2012, when then President Barak Obama signed the JOBS Act into law, creating an opportunity for the average Joe and Jane investor to invest in startup companies. Two mechanisms were created: Regulation Crowdfunding (Reg CF) and Regulation A+ (similar to an IPO, but simpler with less paperwork, and where you can raise up to $50 million). Prior to this, most investment in startups was from so-called “accredited investors” in what is known as a Reg D offering. The US federal government has a strict definition of an accredited investor around income level and/or net worth.
Serious entrepreneurs (AKA startup snobs) like myself, saw Reg CF as sort of a toy. You could sell equity in a crowdfunding campaign instead of pre-sales crowdfunding like you can do in Kickstarter and Indiegogo. You could raise up to $1,070,000 in a Reg CF offering, and the SEC paperwork is much simpler than even a Reg A+ offering. In the beginning, most of us saw this as a way for B2C companies to build a tribe of followers, advocates and evangelists for their product or service, and get a modest amount of seed capital in the process.
Not Your Grandma’s Equity Crowdfunding
One of the Angel investors that was part of the due diligence committee covering GroGuru at the SDAC was a part of WeFunder, one of the top two equity crowdfunding platforms. He suggested that we consider equity crowdfunding as a viable option for GroGuru. I was a skeptic and was armed with all my reasons of why this wasn’t a good idea for us. He was prepared to overcome my objections:
A) Objection: Equity crowdfunding will generate hundreds, if not thousands, of new investors in our company. This will pollute our cap table (a VC term) and make it impossible for us to raise future venture investor rounds. Solution: WeFunder has implemented a ‘lead investor’ model, similar to a syndicate lead on Angel’s List, so they will be the only line item on the cap table and they will have the voting rights of those shares. As compensation for being a lead investor (performing due diligence, make a sizable investment, helping to generate investor momentum, and the administrative part of managing the investment) they will get a carried interest on the investment (i.e., a small percentage of the upside of the full investment in the round)
B) Objection: We are not a B2C company. Will the typical retail investor understand what we do and have an interest? Solution: Your company won the ‘People’s Choice Award’ at the SDAC, so your message is clear and understandable by retail investors. I can recommend a marketing firm that will make your message even more clear to retail investors. We have a number of B2B companies that have run successful campaigns on our platform.
C) Objection: I think I can only generate $100k to $200k from my current investors. Will that generate enough momentum to be a hot deal on your platform? Solution: I will work with you to find a suitable lead investor for your campaign, that should double this amount and get you onto page-one of year active deals.
D) Objection: Although raising $500k to $1M would be helpful for our company, what if we generate a lot of excitement? I wouldn’t want to cap us at $1,070,000. Solution: WeFunder can do a side-car Reg D offering for accredited investors, so as long as some percentage of investors are accredited (which many typically are), you can raise more money than the cap in the Reg CF.
E) Objection: We need quick cash. How long does the process take and when can we get money? Solution: You will need to set your minimum investment at a level that will allow us to communicate the SEC that the campaign in successful, Once you hit that milestone ($200k in the case of GroGuru), you can take a rolling distribution prior to final closing.
F) Objection: I have never raised equity crowdfunding. I cannot afford a team to help me with this process. Solution: WeFunder has a team of experts that has done this many dozens of times. You will have their support, and we will refer you to others in our network for a lead investor, a marketing partner, and someone to help with the SEC required review of your financial statements. We can work with you, and so can the marketing firm, on getting paid out of proceeds from your raise.
G) Objection: Isn’t it too expensive to raise money on an equity crowdfunding platform? Solution: WeFunder charges a single digit percentage on proceeds raised in the campaign. We will provide a carve-out for investors that you source with check sizes of $25k and over where we will waive our commission.
Success Story and the How We Did It
We ended up raising over $2 million in 35 days. According to Crowdwise, the typical equity crowdfunding campaign in 2019 raised $263,719. According to our sources at WeFunder, the typical raise on their platform is $300,000 to $350,000, and the typical length of a campaign is 60 to 90 days. What made us different? What was our ‘secret sauce’?
I think we had success for a number of reasons that are somewhat specific GroGuru including support for farmers, preservation of water and sustainability, my personal track record of building companies, and the traction that we have in the marketplace. So, the more of these qualities that your company has, the better your chances of success. But I think there are some formulaic things that will enhance your success regardless. These secret ingredients include:
The 7 Secret Ingredients
Looking back at the experience, this is what I can distill down as the key success factors of our WeFunder campaign:
1. Set Goals and Expectations
We had an initial goal to raise at least $500,000, with a stretch goal of $1 million. Our big hairy audacious goal (BHAG) was $1.5–1.7 million. We had a clear path to the $500k goal, a strategy to get to the $1 million between a subset of our existing investors making new investments, key people in my network that I could court, our lead investor and their network, and our marketing outreach plan. WE had a motivation and inspiration to get the BHAG. We beat all three. There is no substitute for a plan and a strategy. But there is also no substitute for a winning attitude.
2. Select the Right Platform and Broader Campaign Team
With whatever crowdfunding platform you choose, make sure that you have a champion inside of that company that will help you to navigate through the process and resolve any critical issues in a timely manner. Also, make sure that the audience that is currently on that platform invests in companies like yours. Our champion and the whole team at WeFunder was excellent. They were knowledgeable, professional and very responsive.
Selecting the lead investor was also critical. We were extremely fortunate to have Raging Bull, which runs Startup Camp, as our lead investor. The provided guidance to me about valuation expectations (in our case we raised money in a convertible note, so it was related to the cap), and what type of early bird incentives and discounts to provide to incentivize the early investors in the round. The leadership team at Startup Camp got very excited about our deal, and they did an excellent job getting their network of investors engaged early.
We also had an excellent marketing partner, Arora Project. They created our feature video, which is a critical and essential part of the campaign. We had some good blog and video content, but they helped to refine the script and to get the video into the 3-minute length. We had some excellent customer testimonials in our video, which was very validating about the product-market fit of our solution. The marketing team also helped with creating the content for our home page on WeFunder and making the content very layperson friendly.
We also had an excellent accountant that did the review of our financial statements, and completed that cost effectively and in a timely fashion.
We did reference checks on every one of our partners.
3. Engage Your Network
I cannot overemphasize the importance of engaging and igniting your network. Email is great, but LinkedIn is an essential tool for getting your message out to your network. Let key people in your network know that you want them to like, share and comment on your key posts. This is important at any time for a startup, but especially during a crowdfunding campaign. Sharing the message can be as important, and sometimes more important, than a direct investment from individuals in your network. I personally use in priority order: LinkedIn, Twitter and Facebook. We do a little on Instagram. We also have a content marketing strategy and we actively post blogs and videos on our website. We also have a YouTube channel. Engage and ignite your network and use your social medial channels as leverage.
4. Commit to Engagement from Prospective Investors
I’m sure you’ve heard the saying, ”There’s no ‘I’ in TEAM”. I like to say, ‘Yes, that’s true, but there is an ‘I’ in WIN!” What do I mean by that? In order to win and be successful, as a leader, you must take personal responsibility. It is not about taking credit. Share the credit with the team, which they deserve! But as the CEO, you are the chief fundraiser, and you need to be engaged. In a crowdfunding campaign than means daily commitment and responsiveness to investors and prospective investors with questions. It also means actively managing your Campaign Team. Adapt your management style to the situation. And there are some things that you cannot and should not delegate.
During a 35 day campaign, we had 41 investor questions, 14 investor updates, and dozens of comments on those updates. We created investor video testimonials. I participated in an investor panel arranged by WeFunder. I was on the investor page daily, and answered investor questions as one of my top priorities.
5. Transparency and Storytelling
It is absolutely fine, and even essential, to be passionate, excited and inspired by what you are doing. But I encourage you to be real, honest, forthcoming and humble when dealing with investors, even if they are only investing $100.
I recommend using stories, analogies, and metaphors to get your message across. And if your customers and investors are telling the stories, even better.
6. Listen to the Market
We adjusted our valuation cap and our early bird program based on feedback from our lead investor, even before they committed to be our lead investor. We took feedback from the questions and the comments to adjust our message. Be receptive to feedback. You don’t need to take every recommendation, but I encourage you to listen and then thoughtfully consider the feedback.
7. The Big MO
There is no substitute for momentum in an equity crowdfunding campaign. Like it or not, a lot of investors will likely invest in the hot deal. Find out what it takes to be at the top of page 1 on the equity crowdfunding platform. Then execute a strategy to be on the top and stay on the top. That means that there is a lot of pre-work to build up investor momentum pre-launch, and a commitment to maintain that momentum in the 24, 48 and 72 hours post launch.
In the process of our WeFunder campaign, I have been converted from a skeptic to an advocate. I think equity crowdfunding is still in its adolescent phase, but it holds the promise of being an important component of resolving the funding gap for early stage startup companies. And with Reg A+, even most growth stage companies can have this as an alternative to venture capital financing.
One thing I’ve learned about business and fundraising over the years: as long as you believe in what you’re doing, never give up! You will find a path where there apparently is none. Eventually others will start to understand your vision and the potential of your idea. Your persistence will break down the resistance. Enjoy the entrepreneurial journey!
Taken from https://medium.com/@PatrickHenryQuestFusion/the-7-secret-ingredients-to-a-successful-equity-crowdfunding-campaign-c5773f73e401