As any entrepreneur knows, raising funds for a successful startup can be inconvenient at best, and hopeless at worst. But for those dreading knocking at VC’s doors, take heart: there may be a new way to raise the capital you need, without all the hassle.
Just ask Andrew McLeod, Chief Strategic Office of RentMoola. An online global payment network, RentMoola allows tenants and owners to pay rent and other dues online. McLeod oversaw Canada’s largest equity crowdfunding campaign to date, which used a offering memorandum and funding portal listing to net over $5 million for a 13% equity stake.
Does an equity crowdfunding campaign sound like the perfect solution for your funding woes? Follow these steps:
1. Do your research
Many startups go through a familiar fund-raising trajectory: friends and family, angel, seed, Series A, B, C, and so on. RentMoola did very well in the first two financing stages, but considered a range of options once it got to VC phase.
McLeod says it’s important to consider if an equity crowdfunding campaign is right for your company. “I think there’s a certain type of company that should go that route, and there’s a certain type of company that shouldn’t,” he notes. “If you have a really great elevator pitch and you’re a really great marketer, I think crowdfunding’s amazing, and it’s going to be really successful [for you.] So before you make that investment, you want to make sure that there’s a right fit.”
2. Pick a crowdfunding exemption
Once you’ve decided you want to pursue an equity crowdfunding campaign, you need to decide which crowdfunding exemption you want to use. McLeod says the easiest option is the accredited investor exemption. But you can access a bigger pool of backers via the crowdfunding and offering memorandum (OM) regimes. Both require you to do a certain amount of paperwork.
“We decided to use the offering memorandum exemption because there’s a lot more flexibility around it,” explains McLeod. (The company also used the crowdfunding exemption). “It basically allows anyone to invest, regardless of whether they’re an accredited investor or not, and it doesn’t really put the same limitations that the crowdfunding exemption would have on your fundraising initiatives.”
3. Choose a funding portal
“Equity crowdfunding platforms are fantastic,” says McLeod. “They help with the compliance, it’s easy to set up, [and] they help with the distribution channel for you to get your message and your story out there.” He says finding the right portal is key—RentMoola used Vancouver-based FrontFundr. The portal helped with the application and the setup of the campaign.
4. Take things step by step
“The biggest hurdle is probably the mental barrier to actually completing the OM, completing an evaluation memo, [and] working with a lawyer or an accountant,” says McLeod. It can seem daunting to those new to the process. McLeod’s advice? Stick with it. “Once you get into it, it’s really not that bad,” he says.
5. Count the costs
The OM exemption requires you to show audited financials, which costs a little bit of money, but McLeod says it’s worth it. “Our audit cost was $10,000 for the first year, and for some companies that sounds like a lot of money,” he admits. “[But it’s] not that expensive in the grand scheme of things.”
There’s also the cost of lawyers and accountants. McLeod estimates that altogether the OM ran RentMoola about $40,00050,000. Portals also have fees, for listing, compliance and referrals to customers. That adds up to 8% of the raise at the high end, McLeod says, which is cheap compared to other financing options. “Average cost of capital is significantly higher than that,” he says. “If you’re looking at going through VCs [or] other channels, its going to be significantly higher than whatever you’re going to pay a portal.”
And RentMoola actually came out in front on the costs of the OM. “One of the things that worked out very well for us is that all the people that helped contribute to the offering memorandum ended up investing,” explains McLeod. “We basically got all of our fees back from the lawyers and the accountants and the people that helped us create the documents.”
6. Get your customers on board
Some of the RentMoola’s biggest backers are the very people that use it, according to McLeod. “Believe it or not, a lot of our landlords and property managers are actually investors,” he says. Customers who see a company as their own feel committed to it, he observes.
7. Generate some hype
Running a successful crowdfunding initiative isn’t easy. McLeod says that properly promoting the campaign is essential to its success. (Note that there are significant marketing restrictions for companies using the crowdfunding exemption). “There is that push that you have to do as a company to help build that momentum, and that’s always being out networking, always telling people about the opportunity, sending people a link to the opportunity on the crowdfunding portal, and getting people excited about it,” he explains. “The crowdfunding portals do help generate traffic [but] the more you can generate yourself, the more excited the market gets and the more you can raise.”
8. Watch the calendar
McLeod recommends a following a specific timeline to get the most out of a crowdfunding campaign. “If you can start your documents in May, June, July, release something in August, start building the hype for September, October, November, and then do a close in December-January, that’s the best thing you can do,” he says.
9. Build on the momentum
RentMoola was planning to close its campaign at year-end, but there was still plenty of investor interest. “People still wanted to keep giving us money, so we didn’t end up stopping,” says McLeod. “We raised over 50% more than we had anticipated raising.” The lesson? “When there’s momentum, don’t stop—keep going.”
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