The issue of funding is one that is typically faced by all SMEs at all stages of operation. Be it cash flow for expanding, increasing inventory or streamlining operations, this is an issue all entrepreneurs have faced before. In most cases, SMEs tend to secure funding from the usual sources – angel investors, venture capitalists, bank loans and even personal resources. However, what can you do if none of these are options available?
In recent years, crowdfunding has emerged as one of the most popular forms of alternative funding for amazing ideas that require cash flow to be brought to light. Crowdfunding platforms such as Kickstarter and Indiegogo need no introduction, with a plethora of products and services given life thanks to funding from tens of thousands of individual investors. Some of the biggest crowdfunding campaigns across both platforms run into the hundreds of millions, with the Ethereum blockchain leading the way with a mind-boggling US$4.1 billion. This demonstrates just how much potential there is by opting for this method of fundraising.
The concept of equity crowdfunding (ECF) is merely an extension of the crowdfunding branch, except that it caters to SMEs with proven business models that are looking to expand product offering or services. Although it’s an unconventional method of raising funds, there are several benefits that come with looking for more capital via this method.
Firstly, there’s no need to go through banks which means less red tape and faster access to funds. There’s also no pre-determined KPIs or milestones that must be met within a certain timeframe as the only goal is to expand successfully in order to secure an IPO or an exit for yourself as well as the investors that have a piece of equity.
You also won’t have to scramble to meet unrealistic revenue targets or profit levels by a specific deadline, meaning you can invest the funds you receive for the sole purpose of expanding your already successful SME that you believe in instead of a soulless cash cow. What’s better than being given the opportunity to bring your vision to light without large targets looming overhead?
Longer runway for your company
Securing external funding through ECF is a matter of covering your own bases – there’s inherently less risk involved than using your own funds or capital. A big business decision that turns sour can have the potential to cripple any company if internal funds are used, but having external funds at your disposal can provide more runway to take risks that could potentially pay off handsomely for both the business and investors.
For example, say you want to secure a large amount of stock to satisfy demand. If for some reason the hype dies down, your SME is now left with a ton of stock and no way to get rid of it. External funding can help you recover by bankrolling a pivot or new strategy, whereas using your own funds for inventory would’ve potentially killed your company entirely!
You’re in control
Another aspect that appeals to founders is that with ECF, you’ll be spreading equity among many retail investors, which leaves you firmly in control of your company. There will be no single large shareholders that you must appease or justify business decisions, nor any untoward influence on crucial judgment calls.
In addition, by offering equity of your company on an ECF platform, you’ll get instant market validation as the number of retail investors funding your expansion can be a good indicator that business is going in the right direction. They’re the first ones to buy into your plans so if you’ve got it all laid out and investors flock to it, there’s a good chance customers will do the same!
Chance of securing more funds
There’s also a good chance that you might be able to raise more funds through ECF than if you went to an institutional investor. This is because it’s a small, hassle-free investment for retail investors which is appealing, and the risk is smaller because it’s spread among hundreds or even thousands of them. For VCs or angel investors, putting up a lump sum puts them at greater risk as they’re more exposed and they are taking the sole risk of losing the investment if the business fails to expand successfully.
If you’re interested to learn more about how ECF can help your business, contact us here and we’ll get back to you as soon as we can!