Editor’s note: Vincent Bradley is co-founder and CEO of online equity funding platform FlashFunders.
During April, the nation will observe Financial Literacy Month – meaning it’s time to revisit the diverging roads to funding early-stage startups.
The rise of non-traditional routes for raising capital, such as Kickstarter, has catalyzed a much-needed renaissance in funding options for entrepreneurs. With the passing of the JOBS Act, entrepreneurs have a bevy of new opportunities for raising seed funding, beyond the ever-illusive Silicon Valley checkbook.
There are going to be complications associated with making sense of what funding route is best for your company and product needs, but sometimes the answer will reside in a combination of options.
Crowdfunding projects are generally donation- or gift-based, where fans or “backers” receive early versions of the product and the startup does not pay back the money they’ve received. Crowdfunding platforms help validate proof of concept (the market need/want for your idea), serve as a hub for collecting initial feedback from early adopters and can be a great marketing vehicle.
Once you’re ready to crowdfund, the most important part of your campaign will be your project’s page. If you haven’t already thought about how you’ll communicate the mission of your brand, do so before you click that “Go Live” button on your project. Most platforms walk you through the process, but don’t rush this; make sure you are clear and concise. Remember this project page is your marketing platform and is a great way to launch your business.
Though Kickstarter is not designed to replace venture capital, it has shown great potential to bring ideas to market, and give traction to projects that, if well-executed, can grow.
The downside of crowdfunding is the amount of time you could end up spending on fulfillment and sending your product out to people who have supported your campaign. Startups that do not communicate changes in product shipment schedules often frustrate excited early backers, at a time that is crucial for a business to focus on forward momentum. The upside is that you gain an initial following of dedicated backers who are vested in helping improve your product.
With small-to-medium-sized business lending, you put your own assets on the line should you ever default on a loan. There are two main types of SMB loans: peer-to-peer lending, like Funding Circle, and balance-sheet loans, like OnDeck and Kabbage.
Peer-to-peer loans source multiple investors for one loan to minimize investor risk through diversification, should the company ever default on its loan. Platforms like Funding Circle enable investors to pick and choose who they loan money to, based on mutual interest and belief in the company itself. These loans are directed for long-term investment of periods up to five years before repayment starts.
Loans from companies like OnDeck and Kabbage come directly from the company’s own capital and are geared toward shorter loan periods of six months to a year. These loans are often referred to as cash advances for businesses because they come with higher interest rates and address high-risk businesses that need cash fast.
The downside to SMB lending is that it’s still a loan, which means that eventually you will need to pay back whatever money you borrowed for your business — with interest. The upside is that, if your business succeeds, you keep the profits after repaying the loan in full and walk away from the transaction not owing anything else.
Online equity funding
Online equity funding enables a startup to raise capital in exchange for ownership interest and is focused on raising operational capital that helps a startup grow the business.
The investor deck is your starting point. If you haven’t yet created an investor deck, have a look at the offering pages on AngelList or FlashFunders to see how startups raising capital present their companies. It’s important to highlight the founders, expertise and market opportunity. At the seed stage, investors are investing in the talent, they want to know you can persevere. You need a solid brand idea but they are looking very closely at the pedigree of the team.
Then there’s allocation of capital. Most platforms require businesses to clearly outline how they will use their funds on the offering page. It’s the first question most investors ask: “How will you use this capital to grow your business?”
Don’t think the platform is going to do all the work for you. Come prepared to engage and use the technology to make your funding round more efficient. Technology has made it easier to reach a global network of investors, but you still need to hustle. Reach out to interested investors and let them know you are available to answer questions or demo your product at any time. Don’t be shy about sharing the link to your offering with everyone in your network.
When looking for the right online equity funding platform, dig into the business models. For many, it’s Silicon Valley business as usual, typically taking less than 2 percent of startups that apply, while others are industry-specific (just like crowdfunding). AngelList and FlashFunders are looking to create more of an open marketplace so all businesses looking for capital can find it. Online equity funding is the roadshow reinvented.
The downside to online equity funding is that you give up ownership in your company and must make business decisions accordingly. The upside is that you have mentors and long-term investors who want your business to succeed so they succeed as well.
Crowdfunding, SMB lending and online equity funding are three distinct routes, outside of venture capital land, to seek investments. There are clearly risks and rewards to every choice, so evaluate carefully and seek guidance before making any decisions.