Have loyal customers? Get them to invest in your startup

FORT COLLINS — A major challenge to Colorado startups — although one that the local community is looking to improve — is access to capital and investment.

It’s one reason why entrepreneurs might want to look to equity crowdfunding.

Rob Burnett, who heads business development for crowdfunding platform Netcapital, held a panel at Fort Collins Startup Week about why access to capital has been made easier through this relatively new equity option.

Equity crowdfunding is different from reward-based crowdfunding like Kickstarter, Burnett said, because rather than clients giving money by pre-ordering a product — which for many campaigns doesn’t come to fruition — they invest in the company itself and purchase shares.

“It’s a great way to capitalize a business,” Burnett said. “For the average startup, it can take more than five months to raise a round and in that time a company can run out of runway.”

Equity crowdfunding can also be done through accredited and non-accredited investors. That can open up the field significantly — to be an accredited investor an individual must have a net worth of $2 million or prove they earn more than $200,000 per year for at least two years.

But nonaccredited investors can be anyone, which means startups can offer shares to friends, families and even customers.

The funding option has been legal only since 2016, he said, and there are regulations, including the types of forms filed. For many, though, the best option is to file a Reg CF (CF for crowdfunding) which lets a company raise $1.07 million from accredited and non-accredited investors. Those funds must be raised through a registered funding portal, like Seedinvest, Wefunder, and Burnett’s company, Netcapital.

Equity crowdfunding can provide a route to raising capital when institutional venture capital or angel investors are not committing to investing. Burnett shared how a Michigan legal-tech startup used Netcapital to equity crowdfund after an angel group told the company they would invest only after they saw matching investment. The startup was able to raise significant funds by appealing to potential customers who invested in the startup, and ultimately it got funding from the original angel group and other institutional investors impressed by the traction it got.

In addition to raising funds from friends and family, the ability to have customers invest in the company is one of the benefits of equity crowdfunding.

“Engage your customers,” Burnett said. “A customer who is also an investor is a loyal customer.”

Although there are benefits to equity crowdfunding, it is not risk free. Portals will take a cut. Netcapital, for example, takes 4.9 percent on the backend. Each one is different. Using equity crowdfunding means bringing on shareholders, which always means less control for the founders, as they have shareholders that need to be pleased, usually through a sale that returns them their investment. And a failed equity crowdfund will require some explaining to future investors.

While the option to equity crowdfund is new, it is not the black mark some feared it would be when it first started.

“People thought no institutional investor would touch you,” Burnett said. “What we’re finding, however, is the opposite. It shows a company can be successful in rallying its community and that shows the institutionals they have a product people want and founders who can hustle.”

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