As an entrepreneur, you probably have been in a situation where your business needs more cash to grow – either to fund existing operations or for business expansion. Fret not! In this 4.0 era, there are various emerging channels for a business owner who may not yet be at the size to raise money on the stock markets through an IPO, or even to get loan approvals from the bank. Crowdfunding platforms perhaps can be a great option for you. Nowadays, you can seek investment from loan/financing based crowdfunding or equity crowdfunding, where investors become shareholders. Here are some reasons why as an entrepreneur you should seriously look into raising funds on equity crowdfunding platforms.
Mini IPO experience
Almost all great business owners have this dream to grow their business into a multi-billion dollar company and eventually listing on the stock exchange. The process of offering shares to the public, which is known as Initial Public Offering (IPO), is a very intensive, expensive and lengthy process. Due to regulatory requirements, not many companies can float their shares on the stock exchange. In Malaysia for instance, the minimum market capitalization for a company to go for an IPO is MYR 500 million, and the profit after tax for the most recent year needs to be at least MYR 6 million. In contrast, equity crowdfunding focuses on small and medium-sized companies or even startups. With Malaysian regulators imposing a maximum paid-up capital of MYR 5 million, the process is much simpler and the costs are a tiny fraction of an IPO. Through equity crowdfunding, your promising company can thus offer its shares to the public at a much earlier stage so you have the fire-power or ‘war chest’ to sprint in the business race and potentially reach lofty heights of success.
Learn How To Value Your Company Early With Equity Crowdfunding
From a conceptual perspective, issuing your company’s shares on an equity crowdfunding platform will be similar to an IPO. You need to know your company’s share price, which is derived from your company’s valuation. To arrive at this valuation, business owners must understand how much their company is worth through various methodologies. Usually, it requires an entrepreneur to conduct a comprehensive assessment by evaluating the current business model which can include a wide range of considerations from its operations, strategic decisions, financial position risk and opportunities, secured and recurring business contracts, projections of future cash flow and an assessment of its position in the market. Subsequently, the entrepreneur needs to choose between several methods of valuation such as venture capital-style methods for pre-revenue startups, discounted cash flow (DCF), comparables method, or book value method. Assessing the company valuation basically gives you the opportunity to take a step back and look at your business from a bigger picture. This process can bring great value to you as a business owner as it forces you to critically examine your own business, placing you in a better position to navigate its future.
Exciting Structure To Maintain Your Cash Flow
Unlike loans, equity crowdfunding gives you an advantage by allowing you to focus on growing your business rather than worrying about repaying investors, sometimes with strict or short-term timelines. In addition, you can be creative and offer various structures to the crowd depending on your business plans and projections. Many options are on the table for the business owner when it comes to this – preference shares, ordinary shares, redeemable preference shares, convertible preference shares, and several others. The structure is usually chosen based on the view of the issuer (business owner) of their companies in the future.
Understanding the Trend of Investors Appetite
Before you raise funds on an equity crowdfunding platform, you first need to understand whether your offering matches the appetite of the platform’s investors. For example, if you see a majority of its investors comes from sophisticated or accredited investors, the targeted fundraising amount may not usually be a big concern for such investors. However, if you see the majority of the crowd’s investors from a platform are retail investors who prefer smaller projects, you may need to adjust your expectations accordingly. A platform like Ethis.co, for instance, has been operating for 5 years with a large database of investors coming from 62 countries. In addition to size, investors of a particular platform may have a preference for certain sectors or features. For example, Ethis investors have a clear preference for social-impact investments or social enterprises. Understanding potential investors better will help you be more targeted in your pitch and focus.
Maintain Your Companies at Your Highest Capacity Post Fundraising
Since your company is now partially owned by the crowd, and also featured on the equity crowdfunding platform, you will need to place more due care on the image, reputation and performance of your company and even its employees. It is also important to ensure that your reporting of performance and financials, as well as progress and plans, are well informed to your crowd of new shareholders. Transparency and accountability build trust and support, and conversely a lack of such efforts may lead to issues and problems especially when the expectations of investors are not aligned with the reality of the business. All this will also push you as an entrepreneur to know every single detail on what’s going on with your business. You will have to crunch the numbers and present it to the crowd investors on an annual basis.
In a nutshell, equity crowdfunding is a great avenue for an entrepreneur to raise funds and grow the business. In the past, the entrepreneur needs to find private investors by approaching and pitching to investors one by one. Today, through issuing shares on an Equity Crowdfunding Platform, the pitch can be made to hundreds, even thousands of investors simultaneously. The business owner also does not have to wait 10 years or so to grow their business to qualify for an IPO. Save your time, and increase your growth by issuing shares in your company to the crowd. Ethis Malaysia is here now, your ready platform for Equity Crowdfunding.